Beyond the New Regionalism

BJO

RN HETTNE
Over the last decade regionalism, or what has become known as newregionalism,
has become a prominent issue in a number of social science specialisations:
European studies, comparative politics, international economics, international
relations (IR) and international political economy (IPE). The approach of these
different academic specialisations varies considerably, which means that regional-
ism means different things to different people.
1
In fact, we are facing an intriguing
ontological problem. There has been little agreement about what we study when
we study regionalism. This implies that there also is a lack of agreement about
how we should study it; in other words, we are facing an epistemological
problem as well. The great divide, albeit an exaggerated one, is between what
has been termed old and new regionalism. Whatever the merits of this distinc-
tion, I shall use it in this article as a pedagogical device to underline the shifting
terrain and the instruments to explore it. Yet I shall also propose its dissolution,
and a move beyond new regionalism, in looking more generally for the role of
the regional factor in global transformation. It is in any case awkward to call
something new that now is already more than two decades old. But the search
for continuities does not mean that regionalism constitutes exactly the same
phenomenon across time. On the contrary. The competing approaches (as well
as the earlier approaches here called old) in no way lack merits; it is my ambition
to do justice to what durable contributions they have provided.
Part 1 thus describes the rst generation of regionalism studies, focused on
regional integration in Europe, and the subsequent big leap from the old to
the new regionalism, which really was the study of regionalisms in the context
of globalisation. The old regionalism has been well documented before, so my
purpose is rather to look for continuities.
2
The discontinuities are of course also
acknowledged.
3
Part 2 goes into the various dimensions of the more recent region-
alism, the actors driving it and the societal levels at which it manifests itself.
Besides the globalised context, this multidimensional, multiactor and multilevel
character or, in short, complexity was what distinguished the new regiona-
lism. Part 3 moves from regionalism as such to regionalism as a dimension of the
changing international political economy and world order. I shall suggest that
regionalism might actually shape world order. In a concluding section the achieve-
ments as well as the remaining gaps and unresolved issues of this fascinating eld
are discussed.
New Political Economy, Vol. 10, No. 4, December 2005
Bjorn Hettne, Department of Peace and Development Research, Goteborg University, Box 700,
SE 40530, Goteborg, Sweden.
ISSN 1356-3467 print; ISSN 1469-9923 online=05=040543-29 #2005 Taylor & Francis
DOI: 10.1080=13563460500344484
Generations of regionalisms: continuities and discontinuities
As suggested, regionalism is one of those contested concepts that has continued to
bafe social scientists for years. I have therefore to start with the problem of de-
nition, even if this often has proved to be somewhat of a dead end, due to the fact
that region, regional cooperation, regional integration, regionalism, regionalisa-
tion and region building are moving targets. The overproduction of concepts
signals a certain disarray. Thus we have to come back to the problem of denition
when dealing with different approaches to the elusive phenomenon of regionalism.
Conceptualisation
The concept of region is used differently in different disciplines: in the eld of
geography, regions are usually seen as subnational entities, either historical pro-
vinces (which could have become nation-states) or more recently created units.
In IR, regions are often treated as supranational subsystems of the international
system. It is of some importance whether regions are seen as subsystems of the
international system or as emerging regional formations with their own dynamics.
Even so, such macroregions can be dened in different ways: as continents or as
supranational formations of countries sharing a common political and economic
project and having a certain degree of common identity. The minimum deni-
tion of a world region is typically a limited number of states linked together by
a geographical relationship and a degree of mutual interdependence.
4
According
to a more comprehensive view, a region consists of states which have some
common ethnic, linguistic, cultural, social, and historical bonds.
5
Even more
comprehensively, regions can be differentiated in terms of social cohesiveness
(ethnicity, race, language, religion, culture, history, consciousness of a common
heritage), economic cohesiveness (trade patterns, economic complementarity),
political cohesiveness (regime type, ideology) and organisational cohesiveness
(existence of formal regional institutions).
6
Such parsimonious attempts at
denition seem to have come to an end. Today, researchers acknowledge the
fact that there are no natural regions: denitions of a region vary according
to the particular problem or question under investigation. Moreover, it is widely
accepted that it is how political actors perceive and interpret the idea of a
region and notions of regionness that is critical: all regions are socially
constructed and hence politically contested.
7
But there are other pitfalls. Often a region is simplistically mixed up with a par-
ticular regional organisation. The organisation tries to shape what it denes as its
region by promoting cooperation among states and other actors, which is possible
to the extent that a genuine experience of shared interests in a shared political com-
munity exists that the region is real and not only formal. Regional integration
belongs to an earlier discourse, primarily related to a spiralling translocal market
integration (thus including the building of national markets as well). Regional
integration as a translocal process, simply dened in terms of market factors,
has occurred over a long period of time.
8
The concept of integration can also be
made more or less complex. According to Joseph Nye, the concept of integration
groups too many disparate phenomena to be helpful, and should therefore be
broken down into economic integration (the formation of a transnational
Bjorn Hettne
544
economy), social integration (the formation of a transnational society) and politi-
cal integration (the formation of a transnational political system).
9
Regional
cooperation is somewhat less complex and normally refers to joint efforts by
states to solve specic problems. Ernst B. Haas dened the concept as follows:
regional cooperation is a vague term covering any interstate activity with less
than universal participation designed to meet commonly experienced need.
10
Andrew Axline asserted that regional cooperation can only be understood from
the perspective of the national interests of the individual member states, and
that the politics of regional negotiations will involve accommodating these inter-
ests for all partners.
11
Regional integration is, in contrast, normally taken to imply
some change in terms of sovereignty. According to Haas, the study of regional
integration is concerned with explaining how and why states cease to be wholly
sovereign.
12
Regionalism and regionalisation are two more recent concepts, and much effort
has been devoted to the distinction between them. Regionalism refers to a ten-
dency and a political commitment to organise the world in terms of regions;
more narrowly, the concept refers to a specic regional project. In some denitions
the actors behind this political commitment are states; in other denitions the
actors are not conned to states. According to Anthony Payne and Andrew
Gamble, regionalism is a state-led or states-led project designed to reorganize
a particular regional space along dened economic and political lines.
13
They
go on in their pioneering book to say that regionalism is seen as something
that is being constructed, and constantly reconstructed, by collective human
action,
14
which sounds like a more comprehensive view as far as agency is con-
cerned.
15
Other authors nd it difcult to conne the regionalism project to states.
Helge Hveem also makes a rm distinction between regionalism and regionalisa-
tion, but talks about an identiable group of actors trying to realise the project.
16
Andrew Hurrell lets the concept of regionalism contain ve varieties: regionalisa-
tion (informal integration), identity, interstate cooperation, state-led integration
and cohesion.
17
Sometimes, particularly in a neoliberal discourse, regionalism is
identied with protectionism, normally with (worried) reference to the rise of
economic nationalism in secluded regional markets in the interwar period.
Regionalisation refers to the more complex processes of forming regions;
whether these are consciously planned or caused by spontaneous processes is not
agreed upon by all authors. In my view, they can emerge by either means. More
recently, the concept of region building (in analogy with nation building) has
been employed to signify the ideas, dynamics and means that contribute to
changing a geographical area into a politically-constructed community.
18
Iver
B. Neumann in particular has developed a region-building approach, which he
himself terms post-structural and which sees the region as born in discourse on
inside and outside.
19
The enlargement of Europe, particularly the current debate
on Turkeys inclusion or exclusion, provides a rich source for this kind of analysis.
The early debate
Today the concept of regionalism has become the most common, and it has also
become commonplace to distinguish between an older wave or generation of
Beyond the New Regionalism
545
regionalism (then often referred to as regional integration) in the 1950s and 1960s
and a more recent new wave or generation of regionalism (the new regiona-
lism) starting in the latter half of the 1980s and today being a prevalent pheno-
menon throughout the world.
20
Old theories or approaches to regionalism
were all concerned with peace, and tended to see the nation-state as the
problem rather than the solution.
21
The relevant theories were federalism, func-
tionalism and neofunctionalism. Federalism, which inspired the pioneers of Euro-
pean integration, was not really a theory but rather a political programme; it was
sceptical of the nation-state, although what was to be created was in fact a new
kind of state. There was no obvious theorist associated with federalism. In con-
trast, functionalism has been much identied with one particular name, that of
David Mitrany. This was also an approach to peace building rather than a
theory. The question for functionalists was on which political level various
human needs (often dened in a rather technical way) could best be met.
Usually, the best way was found to be going beyond the nation-state, but not
necessarily going regional.
22
Thus both federalism and functionalism wanted
the nation-state to go, but through different routes and by different means. Inter-
national organisations should be established in the promotion of cooperation
and transnational activities around basic functional needs, such as transportation,
trade, production and welfare. Economics was seen as more important than poli-
tics. Functionalism was rather technocratic and therefore unrealistic. Form, in the
functionalist view, was supposed to follow function, whereas for federalists it was
really form that mattered. Mitrany criticised both federalism and regional inte-
gration in general because both were primarily based on territory rather than func-
tion. For functional solutions there should be no territorial boundaries.
Territoriality was seen as part of the Westphalian logic and Westphalia implied
conict and war. However, in contrast to the European Community (EC), which
was a political community, the European Coal and Steel Community (ECSC)
was, according to Mitrany, a functional and therefore acceptable organisation
(for here the technical question was: how can coal and steel production best be
organised?).
One early approach that to a larger extent had theoretical ambitions was
neofunctionalism: the theory (but also strategy) of European integration. The
central gure here was Ernst Haas. He challenged the functionalist assumption
of the separability of politics, claiming that the technical realm was in fact
made technical by a prior political decision. Neofunctionalists argued that
raising levels of interdependence would set in motion a process eventually
leading to political integration. The emphasis was on process and purposeful
actors, far away from functional automaticity. Haas in fact theorised the commu-
nity method of Jean Monnet. Even if the outcome of this method could be a
federation, the way of building it was not by constitutional design. The basic
mechanism was spillover, this key concept being dened as the way in which
the creation and deepening of integration in one economic sector would create
pressures for further economic integration within and beyond that sector, and
greater authoritative capacity at the European level.
23
Bela Balassa applied a
similar logic to economic integration. A free trade area would lead to a customs
union and further to a common market, economic union and political union.
24
Bjorn Hettne
546
Europe was the centre of the debate about old regionalism. In the 1960s the t
between the neofunctional description (and prescription) and the empirical world,
now dominated by de Gaulles nationalism, disappeared. Stanley Hoffman
asserted that integration could not spread from low politics (economics) to the
sphere of high politics (security).
25
Integration happened only as long as it
coincided with the national interest. The image of the EC began to diverge.
According to Alan Milward, the EC should be seen as a rescue of the nation-
state.
26
The EC could furthermore be understood as a confederation rather than
a federation, according to the intergovernmentalist turn in the study of European
integration. The ontological shift thus implied an epistemological shift towards a
more state-centric, realist analysis.
Haas responded to his critics by calling the study of integration pre-theory
(since there was no clear idea about dependent and independent variables), then
spoke about the eld in terms of obsolescence, and ended up suggesting that
the study of regional integration should cease to be a subject in its own right.
Rather, it should be seen as an aspect of the study of interdependence
(a concept then popularised by Robert Keohane and Joseph Nye).
27
This was
again a new turn. The global context was not really considered by old regionalism
theory, concerned as it was with regional integration as a planned merger of
national economies through cooperation among a group of nation-states. Com-
parative studies were for obvious reasons rare. Haas listed a number of background
factors for successful integration and Philippe Schmitter focused particularly
on Latin America.
28
Axline criticised neofunctionalism for being Eurocentric:
The goal of integration and the dependent variable of the theory used to under-
stand integration remained a higher degree of political unication from the
neo-functionalist perspective. Yet the goal of regional integration in the Third
World was not political unication.
29
The recent debate
In the real world the 1970s was a period of Eurosclerosis within the EC.
Elsewhere, those attempts to create regional organisations that had been made
were failing and most of these organisations fell into dormancy. However, the
1985 white paper on the internal market started a new dynamic process of
European integration. This was also the start of the new regionalism elsewhere;
after some time, everywhere. Naturally, this attracted a lot of interest in the late
1980s and early 1990s. What was striking, though, was the lack of correspondence
in this respect between economics and political science. At that time few intro-
ductions to IR, IPE or development studies contained sections on regionalism.
Today, this is commonplace.
The studies of the new regionalism considered new aspects, particularly those
focused on conditions related to what increasingly came to be called globalisation,
a phenomenon which was to give rise to another academic growth industry.
30
Regionalism is strongly related to globalisation, but there are, as we shall see,
different views on the nature of this relationship. Is regionalisation an integral
part of globalisation, or is it a political reaction against that process? In fact, it
can be both.
Beyond the New Regionalism
547
Regionalisation and globalisation represent related but different aspects of the
contemporary transformation of world order; globalist and regionalist political
projects may have different impacts at different points in time. Contemporary
globalisation can, in accordance with the classical theory of Karl Polanyi, be
seen as a second great transformation, a double movement, where an expansion
and deepening of the market is followed by a political intervention in defence of
societal cohesionthe expansion of market constituting the rst movement and
the societal response the second.
31
The second movement contains counter-
movements caused by the dislocations associated with market penetration into
new areas. Regionalism is thus part of both the rst and second movement, with
a neoliberal face in the rst, and a more interventionist orientation in the
second. There is thus a transnational struggle over the political content of regio-
nalisation, as well as over that of globalisation.
However, regions must at the same time be understood as endogenous pro-
cesses, emerging from within the geographical area in question. They are not
simply geographical or administrative objects, but subjects in the making (or
un-making); their boundaries are shifting, and so are their capacities as actors,
which can be referred to as their level of regionness.
32
Regionness denes the
position of a particular region in terms of regional cohesion, which can be seen
as a long-term historical process, changing over time from coercion, the building
of empires and nations, to voluntary cooperation. In general terms one can speak
of ve levels of regionness: a regional space, a translocal social system, an inter-
national society, a regional community and a regionally institutionalised polity.
The regional space is a geographic area, delimited by more or less natural physical
barriers. In social terms the region is organised by human inhabitants, at rst in
relatively isolated communities, but more and more creating some kind of trans-
local relationship. The region as a social system implies ever widening translocal
relations, in which the constituent units are dependent on each other, as well as on
the overall stability of the system. The region as international society is character-
ised by norms and rules which increase the level of predictability in the system.
The region as community takes shape when an enduring organisational framework
facilitates and promotes social communication and convergence of values and
behaviour throughout the region. Finally, the region as institutionalised polity
has a more xed structure of decision making and stronger actor capability. The
ve levels must not be interpreted in a deterministic fashion as a necessary
sequence. Since regionalism is a political project, created by human actors, it
may, just like a nation-state project, fail. In this perspective, decline could mean
decreasing regionness; ultimately a dissolution of the region itself.
33
Thus endogenous (levels of regionness) and exogenous (the challenges of
globalisation) factors must both be considered. Globalism and regionalism
became competing ways of understanding the world, and much analytical work
was devoted (or wasted?) in trying to clarify how the two processes were
related. Since the impact of globalisation differs in various parts of the world,
the actual process of regionalisation also differs between the emerging world-
regions, thus giving shape to many regionalisms. Globalisation and regionalisation
processes interact under different conditions of regionness, creating a variety of
pathways of regionalisation. This also meant that many different understandings
Bjorn Hettne
548
of regionalism coincided, resulting in great confusion. Let us try to clarify some
of them.
With regard to old and new regionalism, the former was a Cold War pheno-
menon. It was specic with regard to its objectives (some organisations being
primarily security-motivated, others more economically oriented), whereas the
latter resulted from a more comprehensive, multidimensional societal process.
The new regionalism took shape in a multipolar world order and in a context of
globalisation. It formed part of a global structural transformation. In this trans-
formation a variety of non-state actors were to be found operating at several
levels of the global system.
The new regionalism as studied in IPE can also be contrasted both to what is
better termed the new protectionism, which was basically an early interpretation
of the new wave of regionalism by neoliberal economists who feared that the
sudden interest in regionalism heralded a new protectionism.
34
The difference
lay very much in the ontological and epistemological perspectives. Neoliberals
conceived the new regionalism as a trade promotion policy, building on regional
arrangements rather than a multilateral framework; by contrast, for IPE, regiona-
lism was a comprehensive multidimensional programme, including economic,
security, environmental and many other issues. To neoliberals, regionalism
could only be a second-best contribution to the task of increasing the amount of
world trade and global welfare, and at worst a threat against the multilateral
order. The IPE perspective, on the other hand, held that free trade was not the
main issue and that regionalism could contribute to solving many problems,
from security to environment, that were not efciently tackled on the national
level and to which there were no market solutions. Thus, for the neoliberals,
regionalism was new only in the sense that it represented a revival of protection-
ism or neomercantilism, whereas IPE saw the current wave of regionalism as
qualitatively new, in the sense that it could only be understood in relation to the
transformation of the world economy. This also implied that the closure of
regions was not on the agenda; rather, the new regionalism was open regiona-
lism, which emphasised that the integration project should be market-driven
and outward-looking, should avoid high levels of protection and should form
part of the ongoing globalisation and internationalisation process of the world
political economy.
35
Cable and Henderson dened open regionalism as a nego-
tiating framework consistent with and complementary to GATT [the General
Agreement on Tariffs and Trade].
36
For Gamble and Payne, one of the most
striking characteristics common to all the regionalist projects is their commitment
to open regionalism.
37
Another important issue discussed in the context of more recent regionalism has
been that it is a worldwide phenomenon, covering both more and less developed
countries and, in some cases, combining both in the same regional organisation.
Regions can thus be ordered in the world system hierarchy. Three structurally
different types of regions can be distinguished: core regions, peripheral regions
and, between them, intermediate regions. The regions are distinguished, rst, by
their relative degree of economic dynamism and, second, by their relative political
stability, and the dividing line may run through existing states. The borderlines are
impermanent. Rather, one could think of the hierarchical structure as consisting of
Beyond the New Regionalism
549
zones which the regions enter or leave depending on their economic position and
political stability, as well as their level of regionness. This means that the regions
may be differently situated and dened at different occasions, or at different times
in world history. The level of regionness can purposively be changed. For
instance, security cooperation within a region would lead to improved stability,
making the region more attractive for international investment and trade, and
development cooperation would mean a more efcient use of available resources.
The blind man metaphor is relevant also for the recent debate. It contains a
number of different theoretical approaches, from a revival of neofunctionalism
to social constructivism, and with neorealism, neoliberal institutionalism and
liberal intergovernmentalism in between. There are quite a few interesting theore-
tical explanations of specied aspects of regionalism. The problem with rigid
theorising is that it must delimit the object for study, even while the object
refuses too much reductionism.
38
An empirical case can (and perhaps should)
be approached from different theoretical angles. Different theories illuminate
different dimensions of a multidimensional phenomenon. Therefore I will not
propose any preferred theory in this overview.
Dimensions, actors and levels
In contrast with the time in which Haas was writing there are today many region-
alisms and thus a very different base for comparative studies.
39
Different kinds of
regions in interaction have appeared on different levels of the global system. Old
regional organisations continued but with new functions, while new regional
organisations were formed to meet new challenges. At the same time various
actors began to operate in these regional arenas, dealing with regional and
global problems and providing regional and global public goods. In view of all
of this, it is rather obvious that neither the object for study (ontology) nor the
way of studying it (epistemology) will have been likely to have remained
the same. The new regionalism must be seen as a new political landscape in the
making, characterised by several interrelated dimensions, many actors (including
the region itself) and several interacting levels of society.
This second part of the article deals with this regional complexity, a complexity
not minimised by the difculty of clarifying what is inuencing what in this
triangle and the fact that the three issues overlap, particularly level and actor.
An important point here is that the idea of levels is a gross simplication. It is
better probably to talk about scales of regionalism in various regional formations,
which overlap and interact in different issue areas. This complexity is a major
challenge for social science, particularly IR and IPE.
Dimensions
The central issue on which studies of both old and new regionalism focused was
trade. Regional formations were seen as more or less synonymous with trade
blocs. Indeed, as noted above, some were afraid that these trade blocs represented
a step backwards towards protectionism; others saw them as a good substitute to a
badly functioning multilateralism; others again saw them as a step towards global
Bjorn Hettne
550
free trade. Monetary issues are of course inseparable from trade. However, other
dimensions were soon added to the regional complexity. There was, rst of all,
the problem of development, which, albeit often related to trade, is quite distinct
and has generally been discussed in terms of developmental regionalism. Security
also emerged as a regional issue, thus creating an interest in so-called security
regionalism.
40
Trade blocs. Regional trading arrangements are often seen as a second-best
and therefore judged according to whether they contribute to a more closed or
more open multilateral trading system, embodied in the so-called stumbling
block vs. stepping stone dichotomy. Many of the regional trading arrangements
that existed during the era of the old regionalism in the 1950s and 1960s were
inward-looking and protectionist, and were often regarded by contemporary
economists as failures. At the time, however, they were widely considered to be
instruments for enhancing industrial production, as in the strand of development
thinking associated with the United Nations Economic Commission for Latin
America and the even more ambitious strategy of the United Nations Conference
on Trade and Development, both led by Raul Prebisch. The culmination of this
process was the demand for a new international economic order (NIEO). Region-
alism developed into a form of global mobilisation against an unequal world order,
but lost some of its strength in the process. As suggested by Percy Mistry, the
World Trade Organization (WTO) has been hijacked by governments of
Organisation for Economic Cooperation and Development (OECD) countries to
protect their interests in a world where power is challenged by developing
counties.
41
It should thus be recognised that much of todays regionalism,
especially but not only in the South, has often developed in response to the domi-
nance of WTO and globalisation. As Mistry again put it, new regionalism is being
embraced because old multilateralism no longer works.
42
Furthermore, members of regional trading arrangements are increasingly likely
to demand new services from the WTO, so that its discipline serves to police
regional relations and contribute to their health. This need is a severely understated
demonstration of how regionalism is providing a substance to multilateralism.
43
In other words, regionalism can be seen as a prerequisite for reconstructing
multilateralism on a more equal basis.
Monetary regionalism. The monetary issue has been neglected due to the heavy
concentration on trade in the regionalist discourse. Monetary regionalism may
have many objectives, the most important of which is likely to be nancial
stability, which means the absence of excess mobility. Since nancial crisis has
the potential to spread across countries, it requires a collective response, the
main question in this context being at what level. The exit of international
investors from one particular emerging market transforms a national public
bad into a regional and eventually global public bad.
44
Like the trading
system of the world, the nancial system is asymmetric. Financial stability is a
global issue, but the global instruments show a bias against the weak, which has
raised the issue of building regional institutions for protection against excess
volatility.
Beyond the New Regionalism
551
The Asian Financial Crisis (AFC) of 1997 underlined the degree of inter-
dependence within the larger region of Southeast and East Asia and exposed
the weakness of existing regional institutional economic arrangements, causing
crises for both the Association of Southeast Asian Nations (ASEAN) and Asia
Pacic Economic Cooperation (APEC), the two competing regional organi-
sations.
45
The affected countries were frustrated over the lack of remedies
offered on the global level. In the West the opportunity was taken to impose
neoliberal policies in a region known (and criticised) for its interventionism.
Before the AFC there was little discussion about regional approaches to the
management of nancial stability outside Europe. Monetary regionalism in
Europe is itself not a complete success story, but it shows the importance of insti-
tutional backing as well as of political commitment and a common approach to
economic policy. This discovery was later made in East Asia. A regional approach
in the form of an Asian Monetary Fund was proposed by Japan, but received little
support and was resisted by the International Monetary Fund (IMF), the United
States and the European Union (EU). This underscored the need for deeper insti-
tutionalisation and stronger commitments from the countries in the region. In May
2002 there was a meeting of the ASEAN Plus Three (APT) countries in Chiang
Mai about the ways that regional cooperation could combat nancial crises on
the regional level. This meeting may prove to have been a breakthrough for mon-
etary regionalism, but it is too early to tell what the result will be. Looking at the
dynamics of the crisis, it is obvious that ASEAN (which is a sophisticated regional
organisation) is too small, whereas APEC (being transregional) is too big and
contains too many contradictory interests. An appropriate organisation, the
APT, is now emerging, which underlines the fact that the nature of the regional
problem impacts directly on the organisational development of regionalism.
Developmental regionalism. By developmental regionalism is meant concerted
efforts from a group of countries within a geographical region to enhance the
economic complementarity of the constituent political units and capacity of the
total regional economy. This can be pursued via trade agreements or through
more comprehensive regional development strategies. Development is a multidi-
mensional phenomenon which depends on positive spillover and linkages between
different sectors of an economy and society; it can be said to require a regional
approach, whereby trade integration is coupled with other forms of economic
and factor market integration (for example, investment, payments, monetary inte-
gration and harmonisation), as well as various types of economic cooperation in
specied sectors (such as transport and communications).
46
This approach is
both fairer and more politically feasible as it is easier to liberalise with regard
to neighbours than on a multilateral basis; it is also easier to handle distributional
issues in a regional context. Furthermore still, regional trade clubs can deal
more effectively with non-trade economic and political challenges, such as
environmental protection and migration.
47
This line of thinking can be said to be part of the EUmodel and has started to have
effect in different versions in other parts of the world (in ASEAN in Southeast
Asia, in the Andean Community and Southern Common Market (Mercosur) in
Latin America, and in the Southern African Development Community (SADC)
Bjorn Hettne
552
in Africa). The strategy is only manageable within multidimensional and compre-
hensive regional organisations, such as those mentioned, since these can exploit
spillover effects and linkages between trade and non-trade and economic and poli-
tical sectors/benets. By contrast, the North American Free Trade Agreement
(NAFTA) is mainly a trade agreement and will nd it more difcult to exploit
such linkages. What this highlights is the general trend towards more multidimen-
sional forms of regional cooperation and towards regional organisations with a
higher degree of actorness a concept to which we will return shortly.
Security regionalism. We have already noted that the rst generation of regional
integration was concerned initially with economics but ultimately with peace and
security. In more recent theorising, security concerns are seen as causal factors
that force countries to cooperate because of the risk of the regionalisation of con-
ict. By this I mean both the outward spread or spillover of a local conict into
neighbouring countries, and the inward impact from the region in the form of dip-
lomatic interference, military intervention and, preferably, conict resolution
carried out by some kind of regional body. Security regionalism has now
become a genre in its own right.
48
Regionalism and conict can be related in many different ways. One has to do
with the choice of unit for investigation, such as a regional security complex,
dened by Barry Buzan as a group of states whose primary security concerns
link together sufciently closely that their national security cannot realistically
be considered apart from one another.
49
Buzan goes on to note that the task of
identifying a security complex involves making judgements about the relative
strengths of security interdependencies among different countries.
50
The
concept has later been rethought in a multisectoral and social constructivist direc-
tion,
51
making the actual delimitation of the unit more nuanced, but not necess-
arily easier to utilise since different security sectors (economic, environmental,
societal) may dene different regions. The region is thus primarily understood
as a level of analysis and is not seen to possess actor capacity.
52
This is different
from the approach applied here in which region is both level of analysis and
actor.
A second link between regionalism and conict concerns the regional impli-
cations of a local conict, which depends on the nature of the security complex
and the way various security problems are linked. A third has to do with the con-
ict management role of the organised region (if there is one) for internal regional
security, or regional order,
53
for the immediate environment (e.g. the neigbour-
hood policy of Europe) of the region, and for world order as a whole (to the extent
that there is actorness enough to inuence the shape of world order). Conict
management with regard to the immediate environment (but outside the region)
can refer to an acute conict or aim at preventively transforming the situation
by stabilisation or integration. No clear-cut distinctions can really be made.
By security regionalism is thus meant attempts by states and other actors in
a particular geographical area a region in the making to transform a security
complex with conict-generating inter-state and intra-state relations in the direc-
tion of a security community with cooperative external (inter-regional) relations
and domestic (intra-regional) peace. The routes may differ and pass through
Beyond the New Regionalism
553
several stages. The concept also includes more acute interventions in crises, but
the long-term implications should always be kept in mind. The region can be
cause (the regional complex), means (regional intervention) and solution (regional
development). Indeed, in discussing regional crisis management in the longer
perspective beyond intervention, it is important to link security regionalism and
development regionalism. Ultimately, these two dimensions are complementary
and mutually supportive. This is implied in the concept of security communities,
which Karl W. Deutsch famously dened as the attainment of institutions
and practices strong enough and widespread enough to assure, for a long time,
dependable expectations of peaceful change among its population.
54
Actors
Much of current mainstream regionalism theory continues to be dominated by
state-centric perspectives. In summing up the body of research on regionalism
produced by the United Nations University/World Institute for Development
Economics Research (UNU/WIDER), the editors admitted that our project,
in spite of good intentions to the contrary, has been too state-centric and too
focused on formal organisations rather than pinpointing the processes of more
informal regionalisation that take place on the ground.
55
This is by no means
equivalent to rejecting the state. States and intergovernmental organisations are
often crucial actors and objects of analysis in the process of regionalisation.
The state, as well as the forces of state making and state destruction, are all at
the core of understanding todays political economy of regionalism. However,
there is a need to understand how this so-called national/state interest is formed
in the rst place. Neither states nor regions can be taken for granted. The national
interest is often simply a group-specic interest or even the personal interest of
certain political leaders, rather than the public good or national security and devel-
opment understood in a more comprehensive sense. The UNU/WIDER project
suggested that, in the context of globalisation, the state was being unbundled,
with the result that actors other than the state were gaining strength. By impli-
cation, the focus of analysis should not only be on state actors and formal inter-
state frameworks, but also on non-state actors and what is sometimes referred to
broadly as non-state regionalism.
56
A prominent non-state-centric contribution
is Etel Solingens coalitional approach, in which regional orders are deemed to
be shaped by domestic coalitions.
57
In this approach the region is dened by the
grand strategies of relevant coalitions. Other authors treat the region itself as
an actor.
58
Accordingly, I have distinguished below between actors on the regional
arena, and regions as actors in their own right.
Actors in the regional arena. In his book on the political economy of regiona-
lism in Southern Africa, Fredrik Soderbaum unpacks the state and addresses
the question for whom and for what purpose regionalisation is being pursued.
59
He shows how ruling political leaders engage in a rather intense diplomatic
game, whereby they praise regionalism and sign treaties, such as free trade agree-
ments and water protocols. In so doing, they can be perceived as promoters of
the goals and values of regionalism, which enables them to raise the prole and
Bjorn Hettne
554
status of their authoritarian regimes. Often, the state is not much more than a
(neopatrimonial) interest group. Furthermore, although the rhetoric and ritual of
regional diplomacy serves the goal of the reproduction and legitimisation of the
state, it can also be a means to create a facade that enables certain regime
actors to engage in other more informal modes of regionalism, such as trans-
state regionalism or networks of plunder.
60
This has also been referred to as
shadow regionalism.
Business interests are often supposed to be globalist in their orientation.
However, this seems to be a myth. Globalisation strategies tend actually to end
up creating more regionalised patterns of economic activity.
61
According to
Robert Wade, one should talk about the regionalisation rather than the globalisa-
tion of business.
62
For example, the larger European business interests were very
much behind the EUs 1992 project, led by Jacques Delors.
63
For their part, civil
societies are still generally neglected in the description and explanation of new
regionalism. This is an important gap. Similarly, even if the external environment
and globalisation are often readily called into account, extra-regional actors them-
selves are also generally weakly described and conceptualised within the study of
regionalism. This is somewhat surprising, given the considerable attention
which external actors such as foreign powers, donors, international nancial
institutions, non-governmental organisations, transnational corporations and so
on receive in the study of national and local transformation processes, especially
in the South. In the nal analysis, it is not really a question of state-led regionalism
versus non-state-led regionalism. On the contrary, state, market, civil society and
external actors often come together in a variety of mixed-actor collectivities,
networks and modes of regional governance.
64
The region as actor. As indicated, the region is not only an arena, but can also be
seen as an actor, simply through the regional organisation that represents it.
65
It
can be conceptualised in effect as a system of intentional acts, which would
include numerous actors operating in some way in concert. From this perspective,
the difference from a state is one of degree.
66
Furthermore, the capacity of a
regional organisation to act changes over time. There is a link between the organi-
sational capacity and the cohesiveness of the region as such. When different pro-
cesses of regionalisation in various elds and at various levels of society intensify
and converge within the same geographical area, the distinctiveness of the emer-
ging region increases. This process of regionalisation was described earlier in
relation to the notion of increasing regionness, which implies that a geographical
area is transformed from a passive object (an arena) to an active subject (an actor)
that is increasingly capable of articulating the transnational interests of the
emerging region.
67
Actorness, usually referring to external behaviour, implies a larger scope of
action and room for manoeuvre, in some cases even a legal personality. The
concept of actorness (with respect to the EUs external policies) was developed
by Charlotte Bretherton and John Vogler.
68
Capacity to act is of course relevant
internally as well, for instance in the cases of security, development and environ-
mental regionalism three areas where increased regional cooperation may make
a difference within the region itself.
Beyond the New Regionalism
555
Actorness is a phenomenon closely related to regionness, the latter implying an
endogenous process of increasing cohesiveness, the former a growing capacity to
act that follows from the strengthened presence of the regional unit in different
contexts, as well as the actions that follow from the interaction between the actor
and its external environment. Actorness with reference to the outside world is thus
not only a simple function of regionness, but also an outcome of a dialectical
process between endogenous and exogenous forces. The unique feature of regional
(as compared to national great power) actorness is that this has to be created
by voluntary processes and therefore depends more on dialogue and consensus
building than coercion. This way of operating is the model that Europe holds
out as a preferred world order, since this is the way the new Europe (organised
by the EU) has developed in its recent peaceful evolution.
Actorness denes the capability to inuence the external environment.
Regionness denes the position of a particular region in terms of its cohesion.
The political ambition of establishing regional cohesion, a sense of community
and identity has been of primary importance in the ideology of the regionalist
project. A convergence of values may take place even if this is not the explicit
purpose of the project. The approach of seeing region as process implies an evol-
ution of deepening regionalism, not necessarily following the idealised stagist
model presented here, for that mainly serves a heuristic purpose. Since regiona-
lism is always a political project, created by human actors, it may, assuming
that it gets off the ground in the rst place, not only move in different directions,
but also, just like a nation-state project, fail. In this perspective, decline would
mean decreasing regionness. Enlargement, or widening, also implies decreasing
regionness. Generally in the history of the EU, this trend has been countered by
reforms aimed at deepening. Widening and deepening can thus be seen as a dia-
lectic of loss and gain with regard to actorness. To the extent that an enlarged
region can retain the same level of actorness, its presence will increase because
of sheer size. The original European Economic Community contained 185
million people, compared to todays EU with 450 million. European integration
has in fact become the unication and even extension of Europe. But, in terms
of actorness, this has not, judging from the current crisis, increased actor capacity.
Levels
In spite of the enormous literature to date, there is little consensus on the appro-
priate terminology of regionalism when it appears on different levels or scales,
constituting a multitude of forms in complex interrelationship to each other.
Macroregions or world-regions are supranational. Subregions are more or less dis-
tinct parts of large macroregions, such as the newEurope, and often represent more
dense supranational cooperation. If by region we mean instrumental regions with
some actor capacity, we can also make a distinction between intra-continental and
inter-continental transregionalism. Intra-continental regional organisations, such
as the African Union (AU) and the Organisation of American States (OAS), are
usually weak paper organisations without much actor capacity, and therefore
also lack inter-continental relations of any importance. Regional organisations
of a more substantive kind below the continental level, which then develop
Bjorn Hettne
556
relations between continents, have more actor capacity, and their mutual relations
therefore gain a certain signicance for the organisation of world order. In what
follows I will focus on lower and higher levels of regionalism as being thus
far undertheorised in the literature. As higher levels (interregionalism and multi-
regionalism) link up to the discussion on world order in the next part of the article,
I will start with the former.
Lower level regionalisms. As indicated, in the terminology employed here sub-
regions are smaller parts of macroregions. Glenn Hook and Ian Kearns dened
subregionalism as a regionalist project promoted by weaker states in contradistinc-
tion to the Triad or the Core.
69
This corresponds to what I referred to earlier as
intermediate and peripheral regions. In my understanding, regions can be weak or
strong, but, as long as they display internally some degree of regionness, cohesion
and actorness, they are to be seen as distinct regional formations. The Economic
Community of West Africa (ECOWAS) is in this view a region, but it is doubtful
whether APEC is a region. Rather, it is a transregional organisation.
Microregions exist between the national and the local level, because they
consist of subnational territories rather than whole countries.
70
Historically,
microregions have been seen as subnational regions within the territorial boun-
daries of particular nation-states (or before that empires). Microregions may or
may not fall within the borders of a particular nation-state. Increasingly, they
are constituted by a network of transactions and collaboration across national
boundaries, which may very well emerge as an alternative or in opposition to the
challenged state, and sometimes also in competition with states-led regionalism.
71
However, as illustrated by the various concepts of growth polygons, growth
triangles, development corridors and spatial development initiatives, microregion-
alism is often created by networks of state and non-state actors, and even inter-
personal transnational networks (ethnic or family networks, religious ties and so
on).
72
Thus conventional distinctions between international and domestic, as
well as between states and non-state actors, are being diluted. The so-called
growth triangles are particularly interesting from the perspective of the micro-
macro relationship, not the least since there exist a series of interpretations of
the nature of these linkages. Joakim O

jendal points out that the growth triangle

strategy has been described in a multitude of ways in the literature for instance,
as a response to global political transformation, as a complement to macroregional
economic integration, as paving the way for macroregionalism, and as a means to
achieve regional integration while avoiding the creation of a time-consuming
macroregional political bureaucracy.
73
Growth triangles are certainly one of the
most important forms of microregionalism in Southeast Asia, being frequently
considered as driving forces behind economic growth. They utilise the different
endowments of the various countries, exploiting cooperative trade for production
and development opportunities. The initiatives are generally constructed around
partnerships between the private sector and the state, which explains why they
have been referred to as a formof trans-state development.
74
In such partnerships
the private sector provides capital for investment, whereas the public sector
provides infrastructure, scal incentives and the administrative framework to
attract industry and investment.
Beyond the New Regionalism
557
Still, it is evident that micro-level forms of regionalism may sometimes be less
formal and inter-state than formal macroregions; they may ultimately be more
reective of private sector interests than those of either states or civil societies.
However, at the same time there is increasing evidence also that macroregions
and subregions are themselves increasingly inuenced by non-state actors. So,
if regions are made up by actors other than states alone, and if state boundaries
are becoming more uid, then it also becomes more difcult to uphold old distinc-
tions between microregionalism and macroregionalism.
Higher level regionalisms. Regionalisation has structural consequences beyond
and above the particular region. Transregionalism refers to actors and structures
mediating between regions. To the extent that this takes place in a formal way
between the regions as legal personalities one can use the word interregionalism.
If the pattern of interregional relations becomes more predominant, constituting a
new regionalised form of multilateral world order, we speak of multiregionalism.
This is of course a very distant and highly uncertain prospect (to the extent indeed
that it is seen as a prospect at all). Like new regionalisms operating on the regional
level, all transregional arrangements are voluntary and cooperative, but can
become more or less institutionalised and formalised, thus forming the structure
of a multiregional world order.
Interregionalism is the latest step in the theorising of regionalism. The pheno-
menon is very much a consequence of the EU policy of creating and relating to
regions as preferred counterparts in the international system. From this perspec-
tive, interregionalism simply constitutes a part of the foreign policy of the EU,
being the hub of a global pattern of interregional relations. On the other hand, if
regionalism is a global phenomenon, and there are different regionalisms in differ-
ent parts of the world, it is reasonable to expect that many of these emerging
regions, to the extent that they develop actorship (with varying degrees of actor-
ness), will establish some kind of links with each other. Thus interregionalism can
also be explained in relation to the global system.
This point is reinforced by the fact that other regions (ASEAN, Mercosur,
SADC) also now establish interregional relations. Of course, these regions,
albeit harbouring potential structural changes in world governance, are still
embryonic; it is possible therefore to read different trends of theoretical signi-
cance into them. In other words, the problem lies in the ontological status of
what we call interregionalism. The problem, again, is that there is a lack of
consensus regarding that phenomenon as well.
The existing denitions to date are ad hoc and rather provisional, rather than
based on a systematic overview of the phenomenon to be conceptualised and
theorised. To my mind, it is important that the concept of interregionalism is
reserved for formal relations between regions as juridical or at least quasi-juridical
entities, since this is a new political phenomenon, possibly signifying a new post-
Westphalian era. It does not imply post-sovereignty since the regions get their
actorness from the pooling of national sovereignties. Maybe one should talk
instead about the emergence of a putative neo-Westphalian phenomenon?
Interregionalism can also be seen as one of the more regulated forms that
globalisation may be taking. As compared to market-led globalisation in a
Bjorn Hettne
558
Westphalian world of nation-states, it is more rooted in territory; and, in contrast to
traditional multilateralism, it is a more exclusive relationship, since access to
regional formations is limited by the principle of geographical proximity. Never-
theless, interregionalism, not to speak of multiregionalism, is a long-term,
non-linear and uncertain trend which certainly will include setbacks, the nal
outcome of which we cannot yet expect to know.
In sum, looking at the existing patchwork of transregional and interregional
agreements there is, in terms of structural outcome, presently no clear picture
on the horizon. Transregional arrangements are voluntary and cooperative.
They are also very diverse and difcult to categorise. Few are interregional in
the proper sense of the word; some relations are transregional, some bilateral
(for example, hybrid relations between a regional organisation and a great
power). The fact that the EU constitutes the hub of these arrangements is in full
accordance with its regionalist ideology, which, as is well known, encompasses
not only trade and foreign investment but also political dialogue and cultural
relations between regions. We shall come back to this in the third part below.
Regionalism and world order
To go beyond the new regionalism, which was the expressed purpose of this over-
view, implies to my mind looking at the context in which regionalisation occurs, as
well as the interrelationships between regions and the larger context, not least other
regions. It is signicant that the pioneering works in exploring the newregionalism
referred even in their titles to world order (Gamble and Payne) or international
order (Fawcett and Hurrell).
75
In this third and nal part of the article I will there-
fore discuss ways in which regionalism may affect the future world order, dened
in terms of governance, structure and legitimisation. I will investigate alternative
models derived from this somewhat formalistic denition of world order. The
recent coercive trend towards Pax Americana, where regionalism only serves a
unilateral purpose, is contrasted with what I regard as the more deliberative Euro-
pean model, according to which institutionalised regionalism, interregionalism
and ultimately multiregionalism, to different degrees, will gradually shape a
post-Westphalian world order. In view of decreasing actorness in the wake of
the current constitutional crisis in the EU, I will also raise the question of
whether interregional relations will be promoted by other regions as well.
Conceptualising world order
The concept of world order is rarely dened. In recent books the concept often
occurs in the text (sometimes even in the title), but is absent in the index, which
means that it is given a common sense meaning seemingly in no need of being
dened, or used as an attractive slogan, but apparently not really meant to be
thought of as an analytical concept. Hedley Bull focused on international order,
which meant the system of states, and saw world order as both a more general
and a more normative concept, but he left it at that.
76
According to Robert Cox,
who is one of the few to have used the concept in a conscious way for analytical
purposes, it is genuinely transhistorical (there is always a world order of some sort,
Beyond the New Regionalism
559
but not necessarily an orderly one). However, this order is seen as an outcome of
underlying factors social forces and political units which then gain more
analytical importance for understanding world order.
77
The concept is, further-
more, commonly used normatively in a more political sense, which is to say it
describes not primarily the actually existing order (or historical orders) but
models and/or utopian projects. It has even been used as a political slogan.
78
In order to be able to compare alternative models, I propose a non-normative
and mainly political denition of world order as constituted by three dimensions:
structure, mode of governance and form of legitimisation. Structure is the way the
units of the system are related, that is, different forms of polarity determined by
the distribution of power and resources; mode of governance refers to avenues
of inuence on decision making and policy making; legitimisation is the basis
on which the system is made acceptable to the constituent units. On the structural
dimension, I make a further distinction between the unipolar, the bipolar and the
multipolar. Polarity can dene relations between regions as well as great powers
and these relations are not necessarily hostile (as postulated in realist theory). In
the area of governance, the distinction I draw is between the unilateral, the pluri-
lateral and the multilateral. The difference between plurilateral and multilateral is
especially important. A plurilateral grouping of actors is exclusive, whereas multi-
lateral by denition implies inclusion, provided the rules of the game are accepted
by all parties. Multilateralism is therefore often seen as preferable, but, for many
purposes, regionalism, as a form of plurilateralism dened by geographical proxi-
mity, is just as useful. By contrast, unilateralism undermines collective arrange-
ments and may even be a path towards imperialism. By relying on unilateral
decision making, which means prioritising the national interest over collective
security, structural anarchy is promoted for as long as no single power is able to
impose its will on the whole of international society. In that eventuality the struc-
tural result, to the extent that such a policy ultimately succeeds, will be unipolarity
(or imperialism). Needless to say, a well functioning multilateral world order
requires a certain degree of institutionalisation that counters unilateral action,
limited bilateral solutions, or ill-considered political or military reactions which
aggravate sensitive security situations. Finally, in terms of legitimisation, I
discern a declining scale from the universally accepted rule of international law,
through hegemony exercised by one great power (which means acceptable dom-
inance), to pure dominance, legitimised only by the national interest of the domi-
nant power and relying on coercion and pre-emption. The dividing line between
hegemony and dominance is not a very sharp one, but trends in one direction or
the other can easily be established within the general diplomatic/political inter-
national debate. For example, the preparedness to accept dominance increases
after crises such as 9/l l.
With the help of this framework a comparative analysis can be made between
alternative models, as well as of changes in and of world orders over time. The
concepts of international order and world order are often used as pseudonyms.
Here international order connotes a more state-centric conception, whereas
world order connotes a more complex multidimensional and post-sovereign
order. An international system can furthermore be less than globally encompa-
ssing, for instance Europe as a regional international system in the 19th century.
Bjorn Hettne
560
World order of course implies a system including all of the world and all human
beings. The degree of order within a region or in the international system can
vary; thus different security theories speak of regional security complexes, anar-
chies, anarchic societies, regional security communities and so on. The security
agenda is broadened, which makes regional approaches to security more relevant.
Identifying world orders
Theoretically, there are various options of world order. After the First World War,
Europe believed in the power of collective security through the League of Nations.
After its collapse, the United Nations (UN) constituted mankinds new hope for
a stable and just world order based on multilateralism and international law
(and the ction of a international community of equal states). As we saw, the
early theorising on regional integration was, above all, concerned with inter-
national order. Later, in the 1970s, there was discussion of a New International
Economic Order and thus the issue of order and justice was raised on a global
plane. More recently, after the rst Gulf war in 1991, President George H. W.
Bush coined the concept a new world order, based on multilateralism and inter-
national law and upheld via US hegemony. Signicantly, George Bush Senior did
not seek to change the regime in Baghdad after this war. This gives an indication
of his enduring respect for the multilateral world order, since then demolished by
the neoconservative movement and its inuence on the present US administration.
In short, the old multilateral world order, based on US hegemony, is being trans-
formed. The question is: in what direction?
The liberal view of globalisation (globalism), which still enjoys a hegemonic
position, stresses the homogenising impact of market forces on the creation of
an open society. Liberals take a minimalist view on political authority and are
sceptical of regionalism. To interventionist thinkers on the left, who want to poli-
ticise the global, this liberal project is not realistic; these critics tend to see the
unregulated market system as analogous to political anarchy and demand political
control of the market. The return of the political may appear in various forms of
governance. One possible form, assuming a continuous role for state authority, is a
reformed neo-Westphalian order (another rescue of the nation-state), governed
either by a reconstituted UN system that can be called assertive multilateralism,
or by a more loosely organised concert of dominant powers, assuming the exclu-
sive privilege of governance (including intervention) by reference to a shared
value system grounded in stability and order rather than justice. This we can
call militant plurilateralism. The rst is preferable in terms of legitimacy, but,
judging from several unsuccessful attempts at reform, hard to achieve; the
second is more realistic but dangerously similar to old balance-of-power politics
(the Concert of Europe of the 19th century). The multilateral model in a more
assertive form would be based on radical reforms designed to upgrade the UN
into a world order model. Instead, the UN has lately entered its worst crisis
ever, after the unilateral attack on Iraq in 2003 and the corruption scandal relating
to the Iraq Oil for Food Programme in 2005.
A more appropriate form for the return of the political in todays globalised
world would be a post-Westphalian order, where the locus of power moves up
Beyond the New Regionalism
561
the ladder to the transnational level by means of the voluntary pooling of state
sovereignties. The state can be replaced or complemented by a regionalised
order, or by a strengthened global civil society supported by a new normative
architecture of world order values.
79
Global cosmopolitanism thus emphasises
the role of community at the global level, as well as the formation of global norms.
The most likely candidate for such a role, although it does not appear to be
imminent, is the interregional network pursued by the EU, facilitating multi-
regional governance as the major alternative to unilateralism. There is also the
possibility of moving down the ladder, which implies a decentralised, neomediae-
val world, whether constituted by self-reliant communities (stable chaos)
suggested by green political theory
80
or something more Hobbesian (durable
disorder), which at present seems more likely.
81
Transnational forms of govern-
ment on the regional and global level are meant to prevent such a decline of world
order and pathological anarchy.
82
After 11 September 2001 there existed initially, to a greater degree even than in
connection with the rst Gulf war, the possibility of forging an institutionalised
multilateralism, an international regime based on the premises of an extended
scope for international law and extensive participation by states and other transna-
tional actors. Of course, there was never such a thing as fully-edged multilater-
alism. By false multilateralism is meant political and military actions that take
place in the guise of multilateralism, but which in reality are expressions of
more limited interests: plurilateralism, if it is a matter of a group of major
powers; regionalism, if it is a geographically united bloc; or unilateralism, if a
superpower or regional major power is, to all intents and purposes, acting alone.
Unilateralism globally obviously encourages unilateralism at the regional level.
A certain kind of regionalism (interregionalism) may, however, be supportive of
multilateral principles (regional multilateralism, or multiregionalism). But this
is a long-term perspective and will depend on the strength of the political
project of taking regionalism as the crucial element in reorganising world order.
At present, this project is represented principally by the EU.
A European world order: Pax Europaea?
What impact will or could Europe or rather the EU have on the future world
order? The alternative world orders discussed above will of course not appear in
their pure ideal form, but rather in various hybrid forms of combination within
which the inuence of regionalismdiffers. Froma moderatelyconservative perspec-
tive, one formof world order could be the notion of a neo-Westphalian order, gov-
erned either by a reconstituted UNsystem, in which preferably the major regions or,
perhaps more likely, the major powers of the world have a strong inuence; another
alternative would be a more loosely organised global concert of great powers and
the marginalisation of the UN. The relevant powers in both models will be the
regional powers of the world. In the former case, the UN will make use of the old
idea of complementary regional arrangements.
83
In the latter case, regionalism
will suffer from imposed or hegemonic regionalism, and the regions as such will
be far from the ideal of security communities. It will thus be a multipolar and
plurilateral world, but the concert model will be lacking in legitimacy.
Bjorn Hettne
562
Regionalism would, however, put its mark on a future post-Westphalian
governance pattern. In such a world order, the locus of power would move irrever-
sibly to the transnational level. The states system would be replaced or com-
plemented by a regionalised world order and a strengthened global civil
society, supported by a normative architecture of world order values, such as mul-
ticulturalism and multilateralism. The EUs recent emphasis on interregionalism
may in the longer run prove to be important in the reconstruction of a multilateral
world order in a regionalised form, here called multiregionalism, meaning a hori-
zontalised, institutionalised structure formed by organised regions, linked to each
other through multidimensional partnership agreements. The EUs ambition is to
formalise these as relations between regional bodies rather than as bilateral contacts
between countries; but, for the moment for pragmatic reasons, the forms of agree-
ment showa bewildering variety. The EUs relations with the various geographical
areas are furthermore inuenced by the pillared approach in its own internal
decision making, creating articial divisions between, for instance, foreign and
development policy.
84
The development of the pattern has also been inuenced
over time by shifting bilateral concerns among additional members: for example,
the United Kingdom and South Asia, Iberia and Latin America.
Even so, a multipolar system in which the EU constitutes the hub and driving
actor does already exist in an embryonic form. The core of the global interregional
complex contains triangular relations within the Triad. East Asia is dominated by
the two great powers, China and Japan, with which both the US and the EU have
bilateral relations as well. Transregional links within the Triad are constituted by
APEC and by the Asia-Europe Meeting (ASEM), as well as various transatlantic
agreements linking the US and Europe. The partnership between the EU and
ASEAN is a prominent example of a formal interregional relationship, but the
relevant region here (albeit still very informal) is, as argued earlier, the APT,
which is becoming increasingly important not only in the context of ASEM
relations but also for internal purposes. Indeed, the APT may soon become an
East Asian Community.
85
Relations between the EU and Mercosur and between
the EU and the grouping of African, Caribbean and Pacic countries further
extend the global web that has the EU at its centre.
There is thus a clear pattern in the EUs external policy, namely, to shape
the world order in accordance with Europes (more recent) experience of
solving conicts through respect for the other, dialogue, multilateralism
based on international law, and institutionalised relations. This can be called
soft imperialism, based on soft power, since, despite ne diplomacy, it is
often felt as an imposition in other parts of the world. The policy varies along
widening circles from integration (making certain neighbours EU members), to
stabilisation (by entering privileged partnerships with the near abroad), to part-
nership agreements with other regions and important great or middle powers.
Imperialism as world order: Pax Americana?
Yet regionalism, implying the institutionalised multipolar world order structure
preferred by the EU, is unacceptable to the United States, which, furthermore, has
made it very clear that multilateralism, although desirable, also has its limitations
Beyond the New Regionalism
563
as set by US security interests. This is wholly in line with traditional realist secur-
ity doctrine and therefore not new. Yet the current policy of the US goes beyond
classical realism (a` la Kissinger or Brzezinski) towards reinforcing what the neo-
conservative think tank, the Project for the New American Century, describes as a
policy of military strength and moral clarity. This formulation captures the
essence of neoconservatism: military strength and an obligation to use it in a
moral mission to change the world in accordance with American values, rst
amongst which is liberty. The opportunity, the unipolar moment, came after
the end of the Cold War, which means that this thinking is thus older than
9/11.
86
To my mind, it is wrong to call the present world order unipolar,
since the remaining superpower has to ll the power vacuum created by the
collapse of the other. As shown in Iraq, there is no automaticity involved.
To dub this ideological structure neoconservatism is hardly an appropriate
description of what seems rather to be a militant revolutionary doctrine, rejecting
the multilateral world order model and the role of the UN as the protector of this
order. Neoconservatism, or militant libertarianism, and isolationism, however
different these typically American doctrines may seem, are both sceptical about
subsuming national interests to international cooperation and collective security
and constitute different expressions of the specicity (the exceptionalism) of
the US as the home of a chosen people.
The current US policy (but to a lesser extent also that of the administration of
Bill Clinton) is increasingly discussed in terms of imperialism, a concept that is
used academically, pejoratively and positively by different people.
87
A minimum
academic denition of imperialism should surely contain a unilateralist, exploita-
tive, coercive and systematic (the sustainability problem) relationship with the
external world, seen as an object for political and military action by a great
power (designed by its political class). Yet most analysts in the new literature
on imperialism question the dimension of sustainability and point to the problem
of exhaustion or overstretch.
88
Before 9/11 the unipolar moment was just one ideological current within the
US. From the US point of view, the question of multilateralism revolved around
a realistic balancing between legality and effectiveness, and priority was always
given to the latter. Unilateralism maintained the upper hand. This has also
marked the US approach to regionalism, which always has been subordinated to
the national interest. This is clear, for instance in the cases of NAFTA and
APEC and the latters support for regional cooperation in Southeast Asia. All
can be explained by specic, perceived national interests: NAFTA was a globalist
policy, APEC an instrument for hegemonic control in the Asia-Pacic region, and
support for regional cooperation in Southeast Asia a part of the anti-terrorist
struggle.
Conclusion
The rst part of this article discussed the transition from old to new regionalism,
and the continuities and discontinuities involved. Since the new regionalism now
has two decades behind it, this may be the time to bury this distinction and recog-
nise the study of regionalism as a search for a moving target, even if this leaves us
Bjorn Hettne
564
with a complicated ontological problem. We are not quite sure about or agreed
upon the object of study. The very concept of region remains extremely vague
and evasive, and makes sense only when associated with the Westphalian logic
of bounded, politically controlled territories and the question of what happens
to this logic in the context of globalisation and regionalisation. The early theorists
looked for post-Westphalian trends, but the global dynamics were then stied by
the bipolar structure.
One discontinuity that emerges in retrospect is thus the stronger normative and
prescriptive nature of the early debate, whether the point of departure was feder-
alism, functionalism or neofunctionalism. The idea was to achieve peace by
moving beyond the Westphalian logic to nd institutionalised forms of permanent
international cooperation. The more recent debate is generated much more by the
erosion of national borders and the urgent question of how to nd an alternative
order beyond Westphalia. Neofunctionalism, the only one of the three early
approaches with theoretical ambitions, was dismissed before regionalism (or
regional integration which was the preferred concept) had shown its real face.
There was a lively debate without much happening on the ground, or perhaps it
is more correct to say that whatever happened in the eld of regional integration
was distorted and nally stied by the Cold War and the bipolar world order.
Based on this poor showing in the real, empirical world, the critics, mostly realists,
had a fairly easy task in questioning the viability of and the case for regional inte-
gration. The new wave of interest in regionalism should thus be seen in the context
of the ending of the Cold War and the beginning of globalisation. The challenge
now, in other words, is to theorise a fast emerging empirical phenomenon without
much theory to work from.
The way the European case relates to the general phenomenon of regionalism
is an important eld of research. Unfortunately, I myself once called Europe the
paradigm for which, although I did not mean a model to apply, I have been cri-
ticised. A contrary view was expressed by Shaun Breslin and Richard Higgott,
who argued that, ironically, the EU as an exercise in regional integration is one
of the major obstacles to the development of analytical and theoretical compara-
tive studies of regional integration.
89
Andrew Axline has also complained about
the Eurocentric view of regionalisation and the lack of comparative examples.
90
Today, this is no longer the case, but there is still the need for a conceptual and
theoretical framework that can address the complexity of the eld. Andrew
Hurrell insists that, rather than try to understand other regions through the distort-
ing mirror of Europe, it is better to think in general theoretical terms and in ways
that draw both on traditional IR theory and on other areas of social thought.
91
Identity is constructed, but also inherent in history. Many regions coincide with
distinct civilisations. The concept of civilisation is, however, controversial. By
civilisation (in its plural meaning) one can quite simply mean the supreme
level of aggregation for a complex but nonetheless uniform cultural identity.
In Europe it was possible to combine this macrocultural complex with a decentra-
lised political order, but elsewhere it was normally an integrated part of empire
building. It lost importance during the nation-state era when the nation became
the most important carrier of identity. It is interesting that even writers within
the Marxist tradition nd it difcult to renounce the concept.
92
Beyond the New Regionalism
565
Continental regions can certainly coincide with civilisations; they are often
understood in a simple geographic sense. However, there are continental organisa-
tions such as the AU and the OAS which may move from paper existence to real
regions to the extent that this level becomes functional and operational. It is never-
theless misleading to see more operational regions on a particular continent, for
instance Africa, as subregions. Thus ECOWAS and SADC are regions, not
subregions, but depending on the strength of the AU they may become subregions
in the future.
In the second part of the article an attempt was made to show the complexity of
more recent regionalisation initiatives and processes in terms of dimensions,
actors and levels of action. Regionalism was rst interpreted mainly as a
trading arrangement, but it soon became clear that this new trend went beyond
trade and into monetary policy, development strategy, security and environmental
protection, to mention just the most important elds of cooperation or provision of
regional public goods. The region thereby became an arena for many actors apart
from governments, and, through the increasing cohesion of the region (regionness)
as well as through its increasing capacity to act (actorness), the region itself
is becoming an important actor, ultimately with the potential of shaping world
order. In particular, the phenomenon of interregionalism has to be further
theorised. We need to know if it is a general trend in world society or only a
projection of the EU view of the world.
Even in the absence of a thoroughly regionalised world (multiregionalism), the
process of regionalisation is, in one way or the other, bound to have an impact on
the future world order. The current ideology of globalismargues in favour of a par-
ticular form of globalisation, namely, neoliberal economic globalisation. Yet it is a
simplication to identify globalisation with neoliberalism. Other political contents
should in principle be possible and indeed there is emerging a struggle about the
shape of the political content of globalisation. Regionalism can unquestionably
inuence the nature of globalisation. Stronger regions would, for example, shape
the form and content of the global order in different ways, depending on political
trends in the respective regions, trends that may shift direction, thus altering the
preconditions for constructing world order. As discussed in the third section, the
future of regionalism, interregionalism and ultimately multiregionalism depends
very much on the outcome of the struggle between the two contrasting world
order models, represented by the EU and the US. There is a role for regionalism
in both, but of very different kinds: neo-Westphalian in the US model, post-
Westphalian in the EU case. Because of these differences we can assume that
the European vision of world order is different from that of the US and that a
European world order would be different. Europe has in effect been given a
second chance to inuence world order.
The EU also applies its own experiences in conict resolution and development
on neighbourhood relations, as well as on the world as a whole. And so of course
does the US. Two different kinds of power, hard and civil, thus face each other.
Coercion may be replaced by inuence, imposition by dialogue. What has
worked in Europe may ultimately prove to have wider relevance. Indeed, the Euro-
pean model may have relevance even if, judging from the debate on the new con-
stitution Europe no longer seems to believe in it. It is important to note that the
Bjorn Hettne
566
differences do not express varieties of national mentality Europe versus
America but constitute contrasting world order principles held by political
groupings in both areas. It is therefore reasonable to expect coexistence,
whether uneasy or not, and the emergence of hybrids formed somewhere
between these competing world order models. Even so, changes in the US are
much the more important. Notwithstanding the election of the second George
W. Bush administration, there exists in the US now a call for a return to multi-
lateralism: the US and its main regional partners must begin to prepare for life
after Pax Americana.
93
Such a shift would bring Europe and the US closer, but
it will not eliminate the difference between the models of multiregionalism
and a global concert of regional powers; between a post-Westphalian and a
neo-Westphalian world order.
Notes
Much of my recent work in this eld has been carried out jointly with Fredrik Soderbaum, and his help in writing
this article has also been invaluable. Tony Paynes generous support and enthusiasmwas also of great importance,
now as earlier.
1. Donald Puchala once compared this predicament with the blind mans unsuccessful attempts to dene an
elephant. See the discussion in Ben Rosamond, Theories of European Integration (Palgrave, 2000), p. 12.
2. For introductions to the earlier debate focusing on Europe, see R. J. Harrison, Europe in Question (Allen &
Unwin, 1974); Rosamond, Theories of European Integration; and Dimitris N. Cryssochoou, Theorizing
European Integration (Sage, 2001).
3. Previous overviews of the recent debate include Bjorn Hettne, Andras Inotai & Osvaldo Sunkel (eds), Studies
in the New Regionalism, Vols I V (Macmillan, 1999/2001); Mario Telo` (ed.), European Union and New
Regionalism: Regional Actors and Global Governance in a Post-hegemonic era (Ashgate, 2001); and Fredrik
Soderbaum & Timothy M. Shaw (eds), Theories of New Regionalism: A Palgrave Reader (Palgrave 2003).
The most recent addition is Mary Farrell, Bjorn Hettne & Luk Van Langenhove, Global Politics of Region-
alism (Polity, 2005), in which theories, key issues and case studies are presented.
4. See Joseph Nye, Peace in Parts: Integration and Conict in Regional Organization (Little, Brown & Co.,
1971 and 1987).
5. L. J. Cantori & S. L. Spiegel, The International Politics of Regions: A Comparative Approach (Prentice Hall,
1970).
6. Andrew Hurrell, Regionalism in theoretical perspective, in: Louise Fawcett & Andrew Hurrell (eds),
Regionalism in World Politics: Regional Organization and International Order (Oxford University Press,
1995), p. 38.
7. Ibid., pp. 389.
8. Walter Mattli, The Logic of Regional Integration: Europe and Beyond (Cambridge University Press, 1999).
9. Nye, Peace in Parts, pp. 267.
10. Ernst B. Haas, The Uniting of Europe: Political, Social and Economic Forces (Stanford University Press,
1958), p. 16.
11. W. Andrew Axline (ed.), Cross-regional comparisons and the theory of regional cooperation: lessons from
Latin America, the Caribbean, South East Asia and the South Pacic, in: W. Andrew Axline (ed.), The
Political Economy of Regional Cooperation: Comparative Case Studies (Pinter, 1994), p. 217.
12. Ernst B. Haas, The Study of Regional Integration: Reections on the Joy and Anguish of Pretheorizing,
International Organization, Vol. 24, No. 4 (1970), p. 610.
13. Anthony Payne & Andrew Gamble, Introduction: the political economy of regionalism and world order,
in: Andrew Gamble & Anthony Payne (eds), Regionalism and World Order (Macmillan, 1996), p. 2.
14. Ibid., p. 17.
15. The rst mentioned denition is called deliberately straightforward in Anthony Payne, Rethinking
development inside international political economy, in: Anthony Payne (ed.), The New Regional Politics
of Development (Palgrave, 2004), p. 16.
Beyond the New Regionalism
567
16. Helge Hveem, The regional project in global governance, in: Soderbaum & Shaw, Theories of New Region-
alism, p. 83.
17. Hurrell, Regionalism in theoretical perspective, p. 39.
18. Sophie Boisseau du Rocher & Bertrand Fort, Paths to Regionalisation: Comparing Experiences in East Asia
and Europe (Marshall Cavendish, 2005), p. xi.
19. Iver. B. Neumann, A region-building approach, in: Soderbaum & Shaw, Theories of New Regionalism,
pp. 16078.
20. Sometimes the economic nationalism in the interwar period is referred to as the rst wave or generation. Luk
Van Langenhove and Ana-Cristina Costea speak of three generations of regionalism, referring to: a rst gen-
eration of economic integration, a second generation of internal political integration and a third emerging
generation of external political integration. Speaking in terms of generations also allows the authors to
avoid the dichotomy between old and new regionalism. They believe that a neo new regionalism is
shaping up, with greater ambitions in global governance in general and the United Nations institutions
in particular. See Luk Van Langenhove & Ana-Cristina Costea, Third generation regional integration:
the transmutation of multilateralism into multiregionalism?, unpublished manuscript, United Nations
University/Comparative Regional Integration Studies (UNU/CRIS), 2005.
21. This section draws on Rosamond, Theories of European Integration.
22. David Mitrany, The Prospect of Integration: Federal of Functional, Journal of Common Market Studies,
Vol. 4, No. 1 (1965), pp. 11949; and David Mitrany, A Working Peace System (Quadrangle Books,
1943, 1966).
23. Rosamond, Theories of European Integration, p. 60.
24. Bela Balassa, The Theory of Economic Integration (Allen & Unwin, 1961).
25. Stanley Hoffman, Obstinate or Obsolete? The Fate of the Nation State and the Case of Western Europe,
Daedalus, No. 95 (1966), pp. 86585.
26. Alan S. Milward, The European Rescue of the Nation State (Routledge, 1992).
27. Robert O. Keohane & Joseph S. Nye (eds), Transnational Relations and World Politics (Harvard University
Press, 1972); also Power and Interdependence (Little, Brown & Co., 1977).
28. Ernst B. Haas, International Integration: The European and the Universal Process, International
Organization, Vol. 15, No. 4 (1961), pp. 36692; and Ernst B. Haas & Phillipe Schmitter, Economics
and Differential Patterns of Integration: Projections about Unity in Latin America, International Organiz-
ation, Vol. 18, No. 4 (1964), pp. 25999.
29. Axline, Cross-regional comparisons and the theory of regional cooperation, p. 180.
30. Bjorn Hettne & Andras Inotai, The New Regionalism: Implications for Global Development and
International Security (UNU/WIDER, 1994); William D. Coleman & Geoffrey R. D. Underhill (eds),
Regionalism and Global Economic Integratio:. Europe, Asia and the Americas (Routledge, 1998); Telo`,
European Union and New Regionalism; Sheila Page, Regionalism in the Developing Countries (Palgrave,
2000); Fawcett & Hurrell, Regionalism in World Politics; Gamble & Payne, Regionalism and World
Order; Edward D. Manseld & Helen V. Milner (eds), The Political Economy of Regionalism (Colombia
University Press, 1997); and Michael Schulz, Fredrik Soderbaum & Joakim O

jendal (eds), Regionalization

in a Globalizing World: A Comparative Perspective on Actors, Forms and Processes (Zed, 2001).
31. Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Beacon Press,
1957). There are now three editions of this book: by Farrar & Rinehart in 1944 and by Beacon Press in
1957 and 2001. In the 1957 edition R. M. MacIver stressed the lessons for the coming international organ-
ization. The 2001 edition has a foreword by Joseph E. Stiglitz, former chief economist of the World Bank,
who makes the very apt remark that it often seems as if Polanyi is speaking directly to present-day issues.
Polanyi was also early in analysing regionalism and world order: see Karl Polanyi, Universal Capitalism or
Regional Planning, The London Quarterly of World Affairs, January 1945.
32. Bjorn Hettne, Neo-Mercantilism: The Pursuit of Regionness, Cooperation & Conict, Vol. 28, No. 3
(1993), pp. 21132; and Bjorn Hettne & Fredrik Soderbaum, Theorising the Rise of Regionness, New
Political Economy, Vol. 5, No. 3 (2000), pp. 45774.
33. Europes contemporary crisis can be compared to that of a failed state, based on too fragmented a demos or
several demoi, which have no feeling of belonging to the same polity.
34. Others identify new regionalism with one of its aspects, that of open regionalism. See the special issue of
Third World Quarterly, Vol. 24, No. 2 (2003) on Governing the Asia PacicBeyond the NewRegionalism.
35. Kym Anderson & Richard Blackhurst (eds), Regional Integration and the Global Trading System (Harvester
Wheatsheaf, 1993); Jaime de Melo & Arvind Panagariya (eds), New Dimensions in Regional Integration
Bjorn Hettne
568
(Cambridge University Press, 1993); and Vincent Cable & David Henderson (eds), Trade Blocs? The Future
of Regional Integration (Royal Institute of International Affairs, 1994).
36. Cable & Henderson, Trade Blocs?, p. 8.
37. Andrew Gamble & Anthony Payne, Conclusion: the new regionalism, in: Gamble & Payne (eds),
Regionalism and World Order, p. 251.
38. For surveys of theoretical approaches, see Soderbaum & Shaw, Theories of New Regionalism; and Finn
Laursen, Comparative Regional Integration: Theoretical Perspectives (Ashgate, 2003). The former
focuses on theoretical approaches, the latter makes a conscious selection of both theoretical approaches
and empirical cases to illuminate them. Two more focused theoretical explorations are Mattli, The Logic
of Regional Integration; and Stefan A. Schirm, Globalization and the New Regionalism: Global Markets,
Domestic Politics and Regional Cooperation (Polity, 2002).
39. See the special issue of Third World Quarterly, Vol. 20, No. 5 (1999) on New Regionalisms in the
New Millennium.
40. The discussion on these issues draws on Bjorn Hettne & Fredrik Soderbaum, Regional cooperation: a tool
for addressing regional and global challenges, in: Ministry of Foreign Affairs, International Task Force on
Global Public Goods, Stockholm, 2004, available at http://www.gpgtaskforce.org/bazment.aspx
41. Percy S. Mistry, New regionalism and economic development, in: Soderbaum & Shaw (eds), Theories of
New Regionalism, pp. 11739.
42. Ibid., p. 136.
43. Diana Tussie, Regionalism: providing a substance to multilateralism?, in: Soderbaum & Shaw (eds),
Theories of New Regionalism, pp. 99116.
44. Stephany Grifth-Jones, International nancial stability and market efciency as a global public good, in:
Inge Kaul, Pedro Conceicao, Katell Le Goulven & Ronald Mendoza (eds), Providing Global Public Goods:
Managing Globalization (Oxford University Press for United Nations Development Programme, 2003),
pp. 43554.
45. Richard Higgott, From Trade-Led to Monetary-Led Regionalism: Why Asia in the 21st Century will be
Different to Europe in the 20th Century, UNU/CRIS e-Working Papers No. 1, Bruges, 2002.
46. Peter Robson, The New Regionalism and Developing Countries, Journal of Common Market Studies,
Vol. 31, No. 3 (1993), pp. 32948.
47. Nancy Birdsall & Robert Z. Lawrence, Deep integration and trade agreements: good for developing
countries?, in: Inge Kaul, Isabelle Grunberg & Marc A. Stern (eds), Global Public Goods: International
Cooperation in the 21st Century (Oxford University Press for United Nations Development Programme,
1999), pp. 12851.
48. Relevant generalising contributions include: David A. Lake & Patrick Morgan, Regional Orders: Building
Security in a New World (Pennsylvania State University Press, 1997); Emanuel Adler & Michael Barnett
(eds.), Security Communities (Cambridge University Press, 1998); and Barry Buzan & Ole Wver,
Regions and Powers: The Structure of International Security (Cambridge University Press, 2003).
49. Barry Buzan, People, States and Fear: An Agenda for International Security Studies in the Post-Cold War
Era (Harvester Wheatsheaf, 1991), p. 190.
50. Ibid., p. 192.
51. Barry Buzan, Regional security complex theory in the post-Cold War world, in: Soderbaum & Shaw (eds),
Theories of New Regionalism, pp. 14059.
52. See Buzan & Wver, Regions and Powers.
53. See Lake & Morgan, Regional Orders.
54. Karl Deutsch, The Analysis of International Relations (Prentice Hall, 1968), p. 194.
55. Bjorn Hettne, Andras Inotai & Osvaldo Sunkel (eds), Comparing Regionalisms: Implications for Global
Development (Macmillan, 2001), p. xxxii.
56. A large number of labels have been used in the debate for capturing these two similar (but not always
identical) phenomena, such as top-down and bottom-up regionalisation; de jure and de facto regionalisa-
tion; states-led regionalism and market and society-induced regionalisation; and formal/informal
regionalism.
57. Etel Solingen, Regional Orders at Centurys Dawn: Global and Domestic Inuences on Grand Strategy
(Princeton University Press, 1998).
58. See, for instance, Luk Van Langenhove, Theorising Regionhood, UNU/CRIS Working Papers No. 1,
Bruges, 2003.
59. Fredrik Soderbaum, The Political Economy of Regionalism: The Case of Southern Africa (Palgrave, 2003).
Beyond the New Regionalism
569
60. Morten Bas, Marianne H. Marchand & Timothy M. Shaw, The weave-world: the regional interweaving of
economies, ideas and identities, in: Soderbaum & Shaw (eds), Theories of New Regionalism, pp. 192210.
61. Winfried Ruigrok & Rob van Tulder, The Logic of International Restructuring (Routledge, 1995).
62. Robert Wade, The disturbing rise in poverty and inequality, in: David Held & Mathias Koenig-Archibugi
(eds), Taming Globalization (Polity, 2003), p. 34.
63. Roland Axtman, Globalization and Europe (Pinter, 1998), p 173.
64. Fredrik Soderbaum & Timothy M. Shaw, Conclusion: what futures for new regionalism?, in: Soderbaum &
Shaw (eds), Theories of New Regionalism, p. 222.
65. Theorising actorship has so far been focused on the EU. A pioneering study is that of Gunnar Sjostedt,
The External Role of the European Community (Saxon House, 1977).
66. Van Langenhove, Theorising Regionhood.
67. Hettne, Neo-Mercantilism.
68. Charlotte Bretherton & John Vogler, The European Union as a Global Actor (Routledge, 1999), p. 38.
69. Glenn Hook & Ian Kearns (eds), Subregionalism and World Order (Macmillan, 1999), p. 1.
70. Kenichi Ohmae, who observed the phenomenon at an early stage, referred to these formations as
region states, which is somewhat misleading. He also saw them as emerging out of globalisation which
is a simplication. See Kenichi Ohmae, The Rise of the Region-State, Foreign Affairs, Vol. 72, No. 1
(1993), pp. 78-87.
71. Bob Jessop, The political economy of scale and the construction of cross-border microregionalism,
in: Soderbaum & Shaw, Theories of New Regionalism, pp. 17998.
72. James H. Mittelman, The Globalization Syndrome: Transformation and Resistance (Princeton University
Press, 2000); and Markus Perkmann & Ngai-Ling Sum (eds), Globalization, Regionalization and the Build-
ing of Cross-Border Regions (Palgrave, 2002).
73. Joakim O

jendal, South East Asia at a constant crossroads: an ambiguous new region, in: Schultz et al.,
Regionalization in a Globalising World, p. 160.
74. James Parsonage, South East Asias Growth Triangle: A Subregional Response to Global Trans-
formation, International Journal of Urban and Regional Studies, Vol. 16, No. 3 (1997), pp. 30717.
75. Gamble & Payne (eds), Regionalism and World Order and the various follow-up studies from the project
have even been referred to as the world order approach. See, for instance, Fredrik Soderbaum, Introduc-
tion: theories of new regionalism, in: Soderbaum & Shaw, Theories of New Regionalism, p. 11.
76. Hedley Bull, The Anarchical Society: A Study of Order in World Politics (Macmillan, 1995), p. 21.
77. Robert Cox, with Timothy J. Sinclair, Approaches to World Order (Cambridge University Press, 1996).
78. President George H. W. Bushs new world order is the obvious example. Cox comments that the concept
should not become reduced to one specic and political manipulative use of the term: see Cox, Approaches
to World Order, p. 169.
79. Richard Falk, The post-Westphalian enigma, in: Bjorn Hettne & Bertil Oden (eds), Global Governance in
the 21st Century: Alternative Perspectives on World Order (Expert Group on Development Issues, Ministry
of Foreign Affairs, Sweden, 2002), pp. 14783; and Richard Falk, The Great War on Global Terror
(Interlink, 2003).
80. R. R. Goodin, Green Political Theory (Polity, 1992).
81. Mark Dufeld, Reprising durable disorder: network war and the securitization of aid, in: Hettne & Oden
(eds), Global Governance in the 21th Century, pp 74105.
82. Richard Falk, Regionalism and world order: the changing global setting, in: Soderbaum & Shaw (eds),
Theories of New Regionalism, pp. 6380.
83. Alan K. Henrikson, The growth of regional organizations and the role of the United Nations, in: Fawcett &
Hurrell, Regionalism in World Politics, pp. 12268.
84. Martin Holland, The European Union and the Third World (Palgrave, 2002), p. 7.
85. Julie Gilson, Asia Meets Europe (Edward Elgar, 2002).
86. The concept has been coined by the American publicist, Charles Krauthammer, and stands for the US policy
of taking advantage of its military superiority by shaping the world order in accordance with the US national
interest (identied with a general interest). This is a project rather than an established fact. See Charles
Krauthammmer, The Unipolar Moment, Foreign Affairs, Vol. 70, No. 1 (19911992), pp. 2333; and
Unilateralism is the key to our success, Guardian Weekly, 22 December 2001.
87. Roger Burbach & Jim Tarbell, Imperial Overstretch: George W. Bush and the Hubris of Empire (Zed, 2004);
Richard Falk, The Declining World Order: Americas Imperial Geopolities (Routledge, 2004); James
J. Hentz (ed.), The Obligation of Empire: United States Grand Strategy for a New Century (University
Bjorn Hettne
570
Press of Kentucky, 2004); and Chalmers Johnson, The Sorrows of Empire: Militarism, Secrecy and the End of
the Republic (Metropolitan Books, 2004).
88. Paul Kennedy, The Rise and Fall of Great Powers: Economic Change and Military Conict from 1500 to
2000 (RandomHouse, 1987). Eric Hobsbawm made the following observation regarding old and new imperi-
alism, further underlining the problem of sustainability: The present world situation is quite unprecedented.
The great global empires that we have seen before . . . bear little comparison with what we see today in the
United States empire . . . A key novelty of the US imperial project is that all other great powers and empires
knew that they were not the only ones, and none aimed at global domination. None believed themselves
invulnarable, even if they believed themselves to be central to the world as China did, or the Roman
Empire at its peak (cited in Burbach & Tarbell, Imperial Overstretch, p. 179).
89. Shaun Breslin et al. (eds), New Regionalisms in the Global Political Economy (Routledge, 2002), p. 11.
90. W. Andrew Axline, Comparative case studies of regional cooperation among developing countries, in:
Axline, The Political Economy of Regional Cooperation, p. 11.
91. AndrewHurrell, The regional dimension in international relations theory in: Farrell et al., Global Politics of
Regionalism, pp. 3853.
92. Immanuel Wallerstein makes an interesting distinction between civilisation and the empirical historical
system, the empire. A civilization refers to a contemporary claim about the past in terms of its use in the
present to justify heritage, separateness, rights. See Immanuel Wallerstein, Geopolitics and Geoculture:
Essays on the Changing World-system (Cambridge University Press, 1991). Another materialist approach
is to be found in Robert Cox, Civilisations in World Political Economy, New Political Economy, Vol. 1,
No. 2 (1996), pp. 14156. In the globalised condition, civilisations are de-territorialised and constitute
communities of thought, global projects in conict and dialogue. The interplay implies a supra-
intersubjectivity and, if it takes the form of dialogue rather than conict, one can speak of a new multila-
teralism. This concept is developed in Robert W. Cox, The New Realism: Perspectives on Multilateralism
and World Order (Macmillan, 1997).
93. Charles A. Kupchan, After Pax Americana: benign power, regional integration and the sources of stable
multipolarity, in: Birthe Hansen & Bertel Heurlin (eds), The New World Order: Contrasting Theories
(Palgrave, 2000), pp. 13466.
Beyond the New Regionalism
571
The World Economy

(2007)
doi: 10.1111/j.1467-9701.2007.01038.x

2007 The Author
Journal compilation 2007 Blackwell Publishing Ltd, 9600 Garsington Road,
Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA

923

Blackwell Publishing Ltd Oxford, UK TWEC World Economy 0378-5920 2007 The Author Journal compilation Blackwell Publishers Ltd. 2006 >XXX Original Articles REGIONALISM IN THE WORLD ECONOMY RICHARD POMFRET

Is Regionalism an Increasing Feature
of the World Economy?

Richard Pomfret

University of Adelaide and the Johns Hopkins University, Bologna, Italy

Measuring the importance of regionalism in international trade is desirable but difcult. The number of regional trade agreements (RTAs) reported to the WTO or the proportion of world trade which is between countries in a RTA are frequently cited as evidence that regionalism is growing at an accelerating rate. This paper questions whether RTAs really are as important as the headline numbers suggest, or whether they just occupy an excessively large part of policymakers and economic journalists time. The main contributions are to analyse the number of RTAs and the share of world trade criteria in order to show why both are meaningless in the current world economy. The paper concludes that, although the extent of regionalism is difcult to measure and the desirability of individual RTAs is difcult to assess, the threat to the multilateral trading system does not appear to be as large as is often reported, because the long-term dynamics of RTAs lead either to state formation, which is important but rare, or to ineffectiveness, which is the fate of the vast majority of RTAs.

1. INTRODUCTION

R

EGIONAL Trade Agreements (RTAs) are a major and perhaps irreversible
feature of the multilateral trading system is the opening sentence of a
Working Paper (Crawford and Fiorentino, 2005), which appears on the same WTO
webpage as a dramatic graph showing the increasing number of RTAs reported
since the early 1990s.

1

As of June 2005, 312 RTAs had been notied to the
GATT/ WTO, and 196 of these were in the decade after the establishment of the
WTO in January 1995. Numbers like these are so frequently reported that it has
become a stylised fact of the world trading system that regionalism is growing at

Earlier drafts of this paper were presented at the Scottish Economic Society annual conference in
Perth on 2426 April, 2006, and at an IIIS seminar at Trinity College Dublin on 23 May, 2006. The
author is grateful for helpful comments from participants at those meetings and from two anonymous
referees of this journal.

1

The Appendix contains a list of RTAs notied to the WTO up to the end of 2006.
924 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

an accelerating rate.

2

The aim of this paper is to question whether RTAs really
are as important as the headline numbers suggest, or do they just occupy an excessively
large part of policymakers and economic journalists time?

2. HISTORICAL BACKGROUND

The cornerstone of the General Agreement on Tariffs and Trade (GATT) and
hence of the WTO is the non-discrimination principle embodied in unconditional
most-favoured nation treatment. Yet, since 1947 the principle has seemed
under recurring threat, most especially in three waves of discriminatory trade
policies.

3

In the 1950s six western European countries began a process of economic
integration that led to the establishment of a customs union in the 1960s, which
through contagion and imitation effects led to other RTAs. Seven other European
countries formed the European Free Trade Association (EFTA) in 1960. The six
EU members used preferential trading agreements to encourage future members
and as a substitute for traditional foreign policy instruments.

4

Developing countries
in Africa, the Caribbean and Latin America signed many RTAs, which were to
varying degrees modelled on the EU. The Generalised System of Preferences (GSP)
in 1971 legitimised extension of tariff preferences for developing countries. In
the event, however, only the EU itself had any signicant effect in terms of the
impact of preferential trade policies on trade ows. The majority of the original
EFTA members eventually joined the EU, while other RTAs from the 1960s were
weakly implemented and eventually collapsed. Preferential access to rich countries
markets proved to be a feeble instrument for promoting developing countries
exports, because the preferential tariffs under GSP schemes were unilateral and
tended to be revoked if they seriously impacted on trade ows.
A second wave of regionalism was initiated by the United States departures
from the GATT non-discrimination principle in the rst half of the 1980s and
peaked with the 1993 North American Free Trade Agreement (NAFTA). The 1980s
and early 1990s may be seen as a wave because the western hemisphere develop-
ments coincided with the 1983 Closer Economic Relations (CER) agreement between
Australia and New Zealand, and the deepening (through the 1992 project for

2

They are highlighted in, for example, a agship publication of the World Bank (2005) and are
mentioned in passing in many papers as though they prove the case for burgeoning regionalism
without needing comment. A paper by a Canadian government-funded think-tank, entitled The
Rush to Regionalism, states that regionalism in trade and investment agreements has been on a
steep rise since the early 1990s (IISD, 2004, p. 2). In these studies, and in the academic literature,
the

fons et origo

of the belief that RTAs are important and proliferating is the WTO website.

3

The various RTAs are described and analysed more fully in Pomfret (2001 and 2006).

4

In this paper EU is used to refer to the European Union and its predecessor organisations.
REGIONALISM IN THE WORLD ECONOMY 925

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

completing the internal market) and widening (to 15 members in 1995) of the EU.
There were also some new or extended RTAs in South America (Mercosur), South
Asia (SAFTA), West Asia (ECO), Southeast Asia (AFTA) and Africa (many).
In both of these waves, however, apart from the obvious and important
developments in European economic integration and NAFTA, it turned out that
discriminatory trade policies posed less of a threat to the global trading system
than observers like Patterson (1966) or Pomfret (1988) feared. Completion of the
Kennedy Round in the 1960s and of the Uruguay Round in 1994 was much more
signicant for the global trading system than were the contemporaneous waves
of regionalism. By 1995 with the establishment of the WTO there existed a body
of world trade law centred on the non-discrimination principle, strengthened
dispute resolution mechanisms, and low bound tariffs in the major economies for
all goods outside agriculture.
In the early 2000s, a third wave of discriminatory trade policies can be observed.
This time it is led by East Asia, partly stimulated by a perception that the global
economic institutions let the region down in the 1997 Asian Crisis and partly by
the increase of Chinas economic power.

5

The collapse of the 1999 WTO meetings
in Seattle and the diminishing signicance of APEC further stimulated new
approaches to trade liberalisation in the Asia-Pacic region. Bilateral negotiations
were begun in 1999 by Japan with Singapore, and plurilateral negotiations were
initiated between China and ASEAN. Singapore, South Korea and Thailand all
embarked on bilateral agreements. In their embracing of bilateral agreements, the
Asian countries were joined by the USA, which negotiated bilateral trade pacts
with friendly countries such as Jordan, Morocco and Australia. As is obvious
from these examples, although the third wave is often seen as a recrudescence of
regionalism, many of the bilaterals are not regional.

6

Further evidence of increased
regionalism in the early 2000s is seen in the expansion of the EU to 25 members
in 2004 and 27 in 2007, although this is clearly a different development to the
new bilaterals.
In sum, a recurring paradox since 1947 has been between the commitment to
MFN treatment by GATT/ WTO members and the proliferation of RTAs. Regionalism
has twice appeared as a terminal threat to the GATT system, but multilateralism
emerged stronger than ever after the Kennedy and Uruguay Rounds. A third cycle
is in progress, and again the literature on regionalism is ourishing despite the

5

The Severe Acute Respiratory Syndrome (SARS) outbreak in 2003 and then the December 2004
tsunami reinforced the impression of inadequate regional institutions in Asia.

6

When Thailand under Thaksin, for example, embarked on a policy of negotiating bilateral trade
agreements, it began with Bahrain and Australia before moving on to the USA and Japan; this
pattern is weakening Thailands regional trading arrangements by eroding preferential treatment
negotiated within ASEAN. South Koreas experimentation with bilaterals started with Chile and
New Zealand, willing collocutors (even though the New Zealand talks stalled), but hardly regional
neighbours and never likely to generate large bilateral trade ows.
926 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

apparent strength of the WTO system.

7

One difculty with assessing the extent of
the threat that RTAs pose for the multilateral trading system is that the importance
of regionalism is difcult to measure.

3. COUNTING RTAs

Many commentators cite the large number of RTAs notied to the WTO as
evidence of the growth and signicance of regionalism. From this perspective,
because the number of RTAs notied to the WTO reached an all-time high in the
early 2000s, regionalism was more prevalent than ever. Crawford and Fiorentino
(2005) in their survey of RTAs state that Between January 2004 and February
2005 alone, 43 RTAs have been notied to the WTO, making this the most prolic
RTA period in recorded history.
These counts include notications under GATT Article XXIV, GATS Article V,
and the Enabling Clause, as well as accessions to existing RTAs. They undercount
the total number of RTAs, because some RTAs under negotiation have not yet been
notied to the WTO and others are among non-WTO members. On the other hand,
the cumulative WTO counts overstate the current situation because they do not exclude
abrogated RTAs.

8

When ten new countries joined the EU in 2004, 65 RTAs between
the EU and the new members and among the new member countries were subsumed
into the EU RTA. Thus in Crawford and Fiorentinos most prolic RTA period
in recorded history the net RTA formation was minus 22. The period could equally
well be called the biggest withdrawal from RTAs in recorded history!
The main problem with using counts of RTAs as measures of the increasing
importance of regionalism is that, while some agreements are important, many
RTAs are inconsequential. Clearly, all notied RTAs should not carry equal
weight. By any reasonable criterion, the May 2004 EU enlargement was far more
important than a Moldova-Bosnia RTA, but by the counting logic each has equal
weight.
To provide an idea of the dataset on which RTA counts are based, Table 1 lists
the RTAs notied to the WTO during a recent six-month period: the rst half of
2005. Several technical features stand out. The numbers are inated because RTAs

7

One referee questioned this phrase in light of the breakdown of the Doha negotiations in 2006,
but the multilateral trade negotiations, while important, are not essential to the system. The
strengths of the WTO are revisited in the nal section.

8

The current numbers may also be inated because of delays in notication. One of the RTAs
notied in 1995 was the Treaty of Rome, which came into force in 1958, but whose signatories
needed to notify its service terms after GATS. There is also a bunching effect when a new WTO
member noties a raft of pre-existing RTAs (e.g. the Kyrgyz Republic, Armenia, Georgia and
Moldova in the Appendix).
REGIONALISM IN THE WORLD ECONOMY 927

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

which cover both trade in goods and trade in services (Australia-Thailand, Japan-
Mexico and Panama-El Salvador) require MFN waivers under both GATT and
GATS; such double-counting only occurs after 1995 when the GATS came into
effect, which biases comparison of the numbers notied before and after the
establishment of the WTO.

9

Second, the notication date bears little resemblance
to when an RTA takes effect; while the Thailand-Australia and Japan-Mexico
RTAs entered into force at the same time as they were reported to the WTO, the
Croatia-Macedonia RTA had been in effect since 1997 and the Romania-Israel
RTA since 2001 (see Appendix table).
The most striking feature of Table 1 is that most of the RTAs are of minor
importance to the global economy. Twelve are bilaterals involving pairs of eastern
European countries, mostly involving regions of former Yugoslavia, i.e. reecting
regional disintegration. Others involve small trading nations, such as the agreement
between Tunisia and EFTA (Iceland, Liechtenstein, Norway and Switzerland),
the Israel-Romania RTA or the two Panama-El Salvador notications. Even

9

This bias has become more pronounced; of the 23 RTAs notied to the WTO in 2006 all but one
were double-counted.
TABLE 1
RTAs Notied to the WTO, January-June 2005
Agreement Notication Date WTO Provisions Type of Agreement
ThailandAustralia 5 January Article XXIV Free trade agreement
ThailandAustralia 5 January GATS Art. V Services agreement
MoldovaBulgaria 28 January Article XXIV Free trade agreement
MoldovaBosnia & Herzegovina 28 January Article XXIV Free trade agreement
MoldovaSerbia & Montenegro 28 January Article XXIV Free trade agreement
MoldovaCroatia 31 January Article XXIV Free trade agreement
MoldovaFYROM 31 January Article XXIV Free trade agreement
RomaniaBosnia & Herzegovina 14 February Article XXIV Free trade agreement
RomaniaSerbia & Montenegro 14 February Article XXIV Free trade agreement
RomaniaFYROM 14 February Article XXIV Free trade agreement
BulgariaBosnia & Herzegovina 11 March Article XXIV Free trade agreement
BulgariaSerbia & Montenegro 11 March Article XXIV Free trade agreement
PanamaEl Salvador 18 March Article XXIV Free trade agreement
CroatiaFYROM 1 April Article XXIV Free trade agreement
PanamaEl Salvador 5 April GATS Art. V Services agreement
JapanMexico 22 April Article XXIV Free trade agreement
JapanMexico 22 April GATS Art. V Services agreement
RomaniaIsrael 25 April Article XXIV Free trade agreement
FYROMBosnia & Herzegovina 11 May Article XXIV Free trade agreement
EFTATunisia 7 June Article XXIV Free trade agreement
Source: http://www.wto.org see the Appendix for a more extensive listing of RTAs notied from 1995 to
2006.
928 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

when the RTAs involve larger economies (Thailand-Australia or Japan-Mexico),
the restrictive terms of the agreement make it unlikely to have a big impact on
the bilateral trade.
Counting RTAs is not just a poor measure of the extent of regionalism; it can
lead to nonsensical conclusions about trends in the global economy due to the
treatment of regional disintegration and integration. The replacement of a regional
bloc by a web of bilateral or plurilateral agreements increases the number of
RTAs, and by the counting criterion indicates an increase in regionalism. Conversely,
the replacement of a network of minor RTAs by a single RTA can be interpreted
as a decline in regionalism. This is not an abstract point; the dissolution of Yugoslavia,
Czechoslovakia and the Soviet Union and the collapse of Comecon were the main
driving force behind the GATT/ WTO indicator after 1989, while the accession
of ten eastern European countries to the EU in 2004 and 2007 rendered many
notied RTAs null but increased regionalism in Europe.
The main reason for the rapid increase in the number of RTAs during the 1990s
was the proliferation of bilateral and plurilateral free trade agreements among
countries of the former Council for Mutual Economic Assistance and among
successor states to Yugoslavia, the USSR and Czechoslovakia. The new Eastern
European RTAs were a response to regional disintegration, i.e. the dissolution of
a larger regional bloc (the CMEA) or of individual countries, rather than a trend
towards regionalism in Central and Eastern Europe.

10

As the Kyrgyz Republic
(1998), Georgia (2000), Moldova (2001) and Armenia (2003) joined the WTO,
they notied the WTO of their bilateral agreements with other members of the
Commonwealth of Independent States (CIS); nothing changed in their CIS trade
relations, but for these small Soviet successor states WTO accession was an important
step in emphasising the priority of multilateral over regional trading arrangements.
In sum, the increased number of RTAs in the 1990s and early 2000s was largely
driven by a decline in regionalism and shift towards multilateralism on the part
of two dozen formerly centrally planned economies.
Conversely, although the replacement of the myriad trade agreements among
the eight eastern European countries which joined the EU in May 2004 by a single
customs union should by the numbers criterion imply a major retreat from regionalism,
the 2004 EU enlargement can more reasonably be seen as an extension of the ambit
of a major RTA. The number of pre-2004 eastern European RTAs is a misleading
guide to their promotion of regional trade because in the many bilateral agreements
and also in the Central European Free Trade Area (CEFTA) sensitive products were
excluded or put into Appendices with special conditions. This was less possible

10

Disintegration of a country led not only to new international trade agreements among the successor
states, but also increased the number of RTAs of third countries, e.g. Romania notied to the WTO
RTAs with Bosnia, Serbia and Macedonia (Table 1), whereas in the 1980s a single RTA with
Yugoslavia would have sufced.
REGIONALISM IN THE WORLD ECONOMY 929

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

in EU negotiations where the

acquis communautaire

had to be accepted.

11

A similar
phenomenon of a reduced number of RTAs being associated with an extension
of regionalism would arise if the EU brought the Balkan non-member countries
into a customs union similar to that between the EU and Turkey; the customs union
would displace a tangle of RTAs of which 31 have been reported to the WTO.

12

In sum, the common practice of citing the number of RTAs notied to the
WTO as a measure of the extent of regionalism in the global trading system is
unfounded and misleading. It is unfounded because not all notied agreements
are of equal signicance. It is misleading because it interprets the fallout from a
major event of the 1990s (the transformation of eastern Europe and the USSR)
in simplistic terms as an increase in regionalism in the global economy.

4. THE SHARE OF WORLD TRADE COVERED BY RTAs

An alternative measure of the extent of regionalism is the share of world trade
conducted under RTAs. All WTO members except Mongolia have signed RTAs.
According to Crawford and Fiorentino (2005), for some WTO members preferential
trade represents over 90 per cent of their total trade. Schiff and Winters, co-leaders
of a major World Bank research project on RTAs, state that some 55 to 60 percent
of world trade now occurs within such trade blocs (1998, p. 178). These percentages
suggest that the unconditional MFN treatment required by Article I of the WTOs
Charter applies to less than half, or perhaps even less than ten per cent, of world
trade.
Although less self-evidently faulty than the count criteria, this is also a dubious
measure of the extent of regionalism. Take, for example, trade between the USA
and Canada, the biggest bilateral trade ows in the world. After the 1987 Canada-
US trade agreement (CUSTA), all of this trade could be considered to be under
an RTA. Yet CUSTA is commonly viewed as having had only a minor impact
on trade ows, because most US and Canadian tariffs were already below ve
percent. Thus, preferential access to each others markets made little difference
to bilateral trade ows because MFN tariffs were low.
Why then was CUSTA signed? Essentially for non-trade reasons on the US
side and for Canada as an insurance against unilateral protectionist measures by

11

For many observers, a surprising feature of the eastern European countries accession negotiations
and formal EU membership in 2004 was that they boosted trade; e.g.

The Economist

(26 November,
2005) quoted former EBRD Chief Economist Willem Buiter as saying I thought the free-trade
arrangements agreed in previous years had already exhausted the potential. But it seems that quite
a few people were willing to make the necessary investments only when these countries were in the EU.
One reason for failure to exhaust potential was the incomplete pre-accession trade liberalisation; trade
among CEFTA countries in milk, for example, was restricted and only boomed after EU accession.

12

Such a proposal is discussed in Third Time Lucky?,

The Economist

(14 January, 2006).
930 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

the USA. Thus, if some Canadian exports enter the US market unimpeded by anti-
dumping or countervailing duties which would have been imposed in CUSTAs
absence, then that trade might be ascribed to the RTA. When we do not observe
the counterfactual, however, it is hard to measure the RTAs impact.

13

The inclusion of Mexico to create NAFTA was a different matter because
Mexico still had some signicant tariffs in 1993. However, even if we accept
that NAFTA stimulated US-Mexican trade, it is still unclear whether all of this
trade should be ascribed to NAFTA and, if not all, then how much? Mexico was
engaged in substantial unilateral trade liberalisation at the same time as it was
negotiating NAFTA, so that it is not valid to compare trade ows before and after
NAFTA came into effect and ascribe any increase to NAFTA-related liberalisation.

14

The general point is that even if WTO members are parties to RTAs which
eliminate tariffs on most of their trade, in a world with low MFN tariffs such
tariff reductions are unlikely to make much difference to actual trade ows.

15

The
contrast between this conclusion and the perceived large effects of RTAs may be
because modern RTAs go beyond trade, to cover all kinds of behind-the-border
obstacles to trade. These trade costs are important (Anderson and van Wincoop, 2004),
and, as border measures such as tariffs and non-tariff barriers to trade diminish,
the signicance of other trade costs becomes more apparent. The role of RTAs in
diminishing them will be addressed in the next section. The extent to which
behind-the-border trade costs are reduced by an RTA and hence increase trade is,
however, not captured by the size of trade ows between the signatories of the RTA.

5. DEEP INTEGRATION AND THE SPECIFICITY OF RECENT RTAs

A novel feature of the second-wave RTAs of the 1980s such as the Australia-New
Zealand Closer Economic Relations, the Canada-US Free Trade Agreement, or
the EU enlargements, was that they involved countries with fairly low tariffs.
Supporters of the deeper EU, NAFTA or the CER argued that these were new
forms of regionalism going into areas such as increasing-returns industries, policy

13

US-Canada trade disputes continue to exist within CUSTA and NAFTA, e.g. the four-times
recurring softwood lumber dispute, so the issue is whether Canada would have come out on even
worse terms without NAFTA.

14

Again a difculty is that the counterfactual situation is not observed. There may also be an
endogeneity problem if Mexicos multilateral trade liberalisation was related to successfully
improving access to the US market through NAFTA. In the USA, obtaining Congressional approval
of free trade within NAFTA in 1993 was seen as preparing the ground for approval of the more
general trade liberalisation incorporated in the 1994 Final Act of the Uruguay Round.

15

With high tariffs, as in the 1930s, the share-of-world-trade criterion would be more insightful.
In the mid-1980s I applied this criterion to show that most of world trade was conducted under
discriminatory trade agreements (Pomfret, 1985), by which time the criterion was already inappropriate
and the conclusion misleading.
REGIONALISM IN THE WORLD ECONOMY 931

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

harmonisation, or service activities. Robert Lawrence (1996) popularised the term
deep integration to capture regional agreements in these new areas. Such deep
integration can improve market efciency and, in view of the difculties associated
with policy harmonisation, RTAs can provide a testing ground for alternative
policy blueprints. On the other hand, the complexity of deep integration also offers
potential for welfare-decreasing RTAs.
Deep integration has the potential to be welfare-improving by reducing non-
tariff barriers to trade and by cutting behind-the-border trade costs. Non-tariff
barriers hamper regional integration, and in many cases are used by producers to
segment markets in order to enjoy local monopoly power. Major steps in improving
the operation of the EU internal market involved establishing principles of mutual
recognition and disallowing minor variations in safety, health or environment
standards, although this has led to tedious case-by-case judgments.
A positive building block argument for regional agreements is that they can
be testing grounds for international policies in new areas. On the other hand,
turning a policy designed by a few countries into a global institution may arouse
fears of it being moulded to the designers interests.

16

Examples of bilateral
agreements which have gone beyond WTO commitments with respect to TRIMS
(trade-related investment measures) and TRIPS (intellectual property rights) are
discussed below; WTO-Plus articles in a North-South agreement, which benet
the partner from the North but preclude desirable policy options of the partner
from the South, may be a poor blueprint for global agreements.
An alternative building block argument is to recognise that regional agreement
in a controversial new area may be easier than global agreement. The EUs harm-
onisation of competition policy illustrated the difculty of reaching agreement
even among countries with fairly similar economic structures. The Korea-China
FTA goes beyond the WTO in its articles on government procurement.
A disadvantage of the second-wave RTAs is that their increased complexity
means that interest groups, who are well-informed about a particular sector, may
become involved in design of the agreement and may shape the RTA to their own,
but not necessarily the national, benet. Trade diversion is often more politically
acceptable than trade creation because the losers from trade diversion (domestic
taxpayers and non-preferred foreign suppliers) have little impact on the policymaking
process, whereas the costs from trade creation are borne by domestic producer
interests, who are typically better organised and more powerful in shaping policy.

16

The ill-fated multilateral investment agreement designed by the OECD is an example; the low-
and middle-income countries were never likely to accept a global regime on foreign investment
designed by the rich countries which were the home of most transnational corporations. It is not
my purpose to assess the validity of these building block arguments here, but it may be noted that
designing new policies in deep integration areas can be done in global as well as in regional fora;
reducing behind-the-border obstacles to trade is an issue in WTO Doha Round negotiations, and
was the subject of the WTOs 2004

World Trade Report

.
932 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

Thus, there is a potential trade-diverting bias in RTA design, which is one justication
for the GATT/ WTO requirement that an FTA should cover virtually all trade so
that countries cannot customise RTAs to include only sectors where trade diversion
is more likely.

17

With deeper integration the exclusions may be less transparent.
In NAFTA, the rules of origin (RoOs) have been designed, especially for textiles
and apparel and for automobiles, to favour trade diversion. More broadly, the very
detailed RoOs in NAFTA serve to manage trade, often to the benet of specic
US rms, while as a tax on intermediate inputs the RoOs global impact is presumed
to be negative (Krueger, 1999).

18

The extension to service sectors in deep integration
arrangements almost inevitably increases the opportunity for rent-seeking, because
most service providers are governed by regulations which may be desirable but
which also offer the opportunity to erect discriminatory barriers to trade.

19

Third-wave RTAs take up deep integration issues or address very specic trade
issues. One reason for being concerned with a trading partners domestic policies
or service sector structure is a sense that trade should be fair as well as free. If behind-
the-border trade costs vary from country to country, then the trade playing eld
is not at. Foreigners will nd greater difculty in penetrating the market of a country
with poorly developed infrastructure, nancial institutions and other support
services. This concept of unfairness has been most often voiced by the USA,
which sees its home market as easier to supply than other countries markets,
and hence US exporters and import-competing producers are at a competitive
disadvantage.

20

Especially when pushed by the USA or Singapore, whose home nancial sectors
are relatively efcient, third-wave bilateral trade agreements often include measures
of nancial sector liberalisation. The 2002 Japan-Singapore Economic Partnership
Agreement, for example, had little to do with tariffs, which were already low on
goods of interest to the two signatories, but aimed to reciprocally liberalise one
anothers nancial markets.

17

This argument is based on the insight of Olson (1965) into the logic of collective action. Despite
the restriction in GATT Article XXIV, European producers managed for several decades to ensure
through the use of non-tariff measures that the preference margins were especially high on agriculture,
textiles and clothing, cars and steel all sectors where trade diversion was likely to exceed trade
creation (Pomfret, 1986).

18

The 900+ pages required to document the North American Free Trade Agreement illustrate the
point that many RTAs described as FTAs do not t the formal denition of a free trade area, which
would require a very simple agreement to abolish tariffs on internal trade. This applies to all of the
so-called free trade agreements in Table 1.

19

Messerlin (2005) cites the example of the high-level French lobbying to exclude bailiffs, notaries
and barristers to the Supreme Courts from the EU Directive on Services.

20

This US attitude predates the third-wave bilaterals; in the 1980s aggressive threats of targeted
unilateral action were used by the USA to open, for example, South Korean insurance markets
(Bhagwati and Patrick, 1990). Similar market opening pressures became a feature of the EUs
market deepening, especially with respect to nancial services after the last national-level capital
controls were removed in the early 1990s.
REGIONALISM IN THE WORLD ECONOMY 933

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

More controversial has been the US position of going beyond WTO commitments
on TRIMS and TRIPS. WTO-Plus on TRIMS has included references to indirect
expropriation (i.e. requiring compensation if policy changes reduce the expected
protability of a foreign investment) or mechanisms requiring compulsory inter-
national arbitration. On TRIPS, obligations to register patents on existing drugs if
new uses are found, as in the US-Morocco FTA, may extend a patents life beyond
the requirements of TRIPS a practice sometimes called evergreening of patents.
In both of these areas, the WTO-Plus features benet US transnational corporations
but reduce the partners policy exibility, and may constrain negotiating options
within the WTO (IISD, 2004, p. 25).
Third-wave bilateral trade agreements are replete with examples of highly
specic agreements. The typical scenario is announcement of free trade negotiations
accompanied by data on the total trade between the negotiating countries and
estimates of the potential welfare gains from trade expansion, and then several
years later the governments sign a highly specic agreement, which may achieve
limited goals, but also reects a desire not to lose face by abandoning the free
trade agreement. The 2004 Australia-US FTA, for example, involved two countries
with substantial bilateral trade, but the outcome was almost trivial; Australia
failed to achieve its major goals of reducing obstacles to its farm exports to the
USA, but still signed the agreement, while the USA obtained a specic TRIPS
concession from Australia.

21

In the negotiations between Thailand and Japan the
key issues for Thailand were reducing barriers to agricultural exports and to
labour mobility and for Japan the key issue was reducing Thai tariff peaks which
hindered the integration of production by Japanese subsidiaries in the Thai car
industry. The Japan-Thailand FTA addressed these issues: Japan reduced the
import duty on chickens from six per cent to three per cent and allowed Thai
cooks to work in Japan, and Thailand reduced the 80 per cent tariffs on cars and
parts to 60 per cent. It is difcult to think of a metric which would capture the
signicance of these minimalist results for the global trade regime, although it is
clear that simply adding two more to the number of RTAs or including all of
Thai-Japanese trade in a measure of trade covered by RTAs would be grossly
misleading characterisations of the Thai cooks agreement, as it is called by
Japanese economists.

21

For Australias Liberal government bilateral trade negotiations were intended to produce a
comprehensive agreement which would show the value of the special relationship with the USA.
In the face of widespread and increasing domestic discontent over military support for the USA in
Afghanistan and Iraq, it became impossible for the government not to obtain a trade agreement.
The nal agreement excluded sugar and included only limited access to US beef and dairy markets
with an 18-year phase-in period (all three products had been initially identied by the Australian
negotiating team as deal-breakers). For the USA the TRIPS agenda was narrowly focused on
forestalling changes in Australian patent laws that would facilitate export of generic pharmaceutical
products to Asia.
934 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

The specicity of these beyond trade arguments in support of second- and third-
wave RTAs makes it difcult to generalise about their desirability and almost
impossible to measure the extent of regionalism in the global economy. One issue
is that, even though regional arrangements with deep integration or the recent
bilateral agreements are not concluded in global fora, their impact is often non-
preferential and benecial to the global trading system. Improved operation of the
EU-wide nancial system, for example, helps to make trade nance competitively
available to external as well as internal suppliers to EU markets. Measures such
as improvements in customs clearance efciency should facilitate all trade.

22

A
second issue is the difculty of quantifying the effect of measures that reduce
trade costs. Whereas the impact of a tariff cut or removal of a non-tariff barrier
affecting a specic product can be estimated, at least as a rst approximation,
with a partial equilibrium model, quantifying the impact of a measure that reduces
trade costs in general requires a general equilibrium model. In principle, computable
general equilibrium (CGE) models can estimate the impact of a deep integration
measure or a trade-facilitating non-tariff item in a bilateral treaty and they can
contrast regional implementation with global implementation, but in practice
CGE models are too coarse to capture the specicity of such measures.

23

Before
concluding on the extent of regionalism, the next section reviews how patterns of
regionalism differ from one part of the world to another.

6. DIFFERING CONTINENTAL PATTERNS

Europe is the prime example of regional integration over the last half century.
The EU now covers all of what might be considered to be Europe, apart from a
few gaps of fairly small countries and a couple of larger countries to the east. As
a customs union it is an RTA, but the EU is much more and at least some of its
citizens see the EU as a stepping-stone towards economic, and perhaps political,
union. In this respect the EU was practically unique in the second half of the

22

In practice, there may be discrimination for technical reasons, e.g. if Thai customs expand the
electronic clearance facility this may benet Malaysian exporters to Thailand but be infeasible for
Lao exporters to Thailand who do not have computers. There are some explicitly preferential trade
facilitation measures, such as the US fast-tracking container clearance which is limited to trading
partners with whom the US has a trade agreement (e.g. a container from Singapore does not require
the individual inspection legislated post-9/11 as long as it has been certied and sealed in Singapore,
but a container from Indonesia will not be exempted from inspection).

23

A common approach by CGE modellers is to assume that the RTA will reduce trade costs by

x

per cent (and test for sensitivity to various choices of

x

). While this avoids the crass simplication
of share-of-world-trade measures of the impact of RTAs, it is too general to capture the specic
measures in actual RTAs and given the side restrictions in many agreements it is likely to overstate
the trade impact. This is not to imply that quantitative exercises should be ignored; especially when
based on complementary techniques (e.g. CGE models, gravity equations, et al.) such analysis can
provide insights into potential benets from RTAs.
REGIONALISM IN THE WORLD ECONOMY 935

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

twentieth century. The only close parallel is the relationship between Australia and
New Zealand, with much shared culture and history, and the CER is the deepest
RTA apart from the EU.
Between 1957 and the early 1970s the EU used trade agreements as a tool of
foreign policy and constructed a pyramid of preferences which challenged the
non-discrimination principle upon which GATT was based. These discriminatory
arrangements have become less signicant since the 1970s, as the EU has found
superior foreign policy instruments, and less complex, as the intended goodwill
effect was eroded by preferred partners concerns about their relative position in
the pyramid. Preference margins were eroded by cuts in the EUs MFN tariffs in
the various rounds of multilateral trade negotiations, and the 2001 Everything
But Arms regulation granted duty-free access to EU markets to all least devel-
oped countries exports other than arms.

24

The 1995 Barcelona Process to create
a Euro-Mediterranean free trade area by 2010 and the 2000 Cotonou Partnership
Agreement with African, Caribbean and Pacic countries are essentially artefacts
from the earlier era, which now aim to create simplied reciprocal free trade
regimes with the two broad groups of most preferred partners rather than to create a
nely delineated hierarchy of partners and clients.
The USA was the main defender of non-discriminatory trade policies until 1980,
but after that it began to use RTAs to strengthen western hemisphere ties among
market-based democracies and as an instrument of foreign policy. The Caribbean
Basin Initiative, which was in 198283 the rst step in this new direction, now
includes 24 Caribbean nations, with Cuba as the signicant exception. The USA
used NAFTA to cement reforms in Mexico, and then at the December 1994
Summit of the Americas in Miami advocated a Free Trade Area of the Americas
(FTAA).

25

The FTAA has been resisted in parts of Latin America (e.g. Argentina,
Brazil and Venezuela) and the original 1 January, 2005, deadline for concluding
negotiations has passed. In South America, Mercosur is an alternative vehicle for
regional integration, but Mercosur has been characterised by conicts between
the two big members (Brazil and Argentina) and by complaints from Paraguay
and Uruguay about their actual access to those countries markets.

24

As with the EUs GSP scheme, however, utilisation of the EBA regulation was limited by restrictive
rules of origin (Candau and Jean, 2005). The pyramid of preferences was an example of what
Bhagwati (1995) later termed the spaghetti bowl effect of overlapping RTAs, as some countries
may have been covered by several schemes which were not consistent with respect to RoOs,
product-specic quotas, etc.; in consequence, resources were expended in understanding the complex
rules and opportunities to benet from preferential access to the EU were not realised due to lack
of information.

25

The USA has also signed bilateral agreements with Chile in 2003 and with ve Central American
countries and the Dominican Republic (CAFTA) in 2004. The USA has been negotiating with four
Andean nations (agreement was reached with Peru in December 2005, but negotiations with
Colombia and Ecuador are stalled, and talks with Bolivia were halted after the 2005 election) and
Panama. Canada has also signed bilateral agreements with Chile and Costa Rica.
936 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

Outside the western hemisphere, RTAs have limited economic signicance for
the USA. They are largely aimed at achieving specic goals and used as an instrument
of foreign policy. The rst such RTA was the 1985 US-Israel free trade agreement,
which was in response to an EU-Israel FTA and clearly a special case. The bilateral
trade agreements negotiated by the USA since 2001 (Jordan, Singapore, Australia,
Bahrain, Morocco and South Africa) are intended to reward allies. Such agreements
can be expected to benet the smaller partner, although their economic content
is minor as any sensitive products are likely to be excluded.

26

The USA has exerted
some trade diplomacy at a regional level, proposing a Middle East Free Trade Area
and the Enterprise for ASEAN Initiative, but with little concrete to show for it.

27

Proposals for RTAs made minimal progress in Asia before the late 1990s. In
East Asia regional integration has increased since 1985, but it has been market- rather
than policy-driven.

28

ASEAN was formed as a political bloc and despite many
ideas for joint industrial projects or for preferential tariffs it had little economic
content until the ASEAN free trade area (AFTA) began to be taken slightly more
seriously in the 1990s.

29

Malaysias proposal for an East Asian Economic Caucus
in the late 1980s was successfully opposed by the USA and Australia, and the
open regionalism (i.e. coordinated non-discriminatory trade liberalisation) of
Asia-Pacic Economic Cooperation (APEC) became the model for the region;
the Bogor Declaration at the 1994 APEC summit expressed consensus on the
multilateral approach. Japan, South Korea, China, Hong Kong and Taiwan stood
out as economies without RTAs.
The 1997 Asian Crisis stimulated ideas about the need for regional coordination,
but initial proposals were for monetary rather than trade cooperation, and these
proposals appeared to hit a wall after the 2000 Chiang Mai Initiative (Pomfret,
2005). The stimulus for the changed attitude towards RTAs came from China,

26

Trade agreements between a big country and a small country typically reect political motives
on the part of the large country and economic motives on the part of the small country. The
standard analysis of the economic consequences of RTAs shows that if one partner is a price-taker
(i.e. a small country in trade theory terms) then it will reap all the benets from preferential tariff
reductions; see Schiff and Winters (2003) for a recent restatement.

27

The USA has also signed Trade and Investment Framework Agreements (TIFAs are described
by the USA as a prerequisite to a subsequent free trade agreement or a bilateral investment treaty)
with Indonesia, the Philippines, Thailand, Brunei and Malaysia, i.e. all the ASEAN countries
except Singapore (which has an FTA with the USA) and the four newest members (Cambodia,
Laos, Myanmar and Vietnam).

28

The 1985 Plaza Accord encouraged Japanese corporations to move assembly operations offshore.
The booming high-performing Asian economies created market demand whose growth outpaced
that in any other part of the world and hence created markets for one anothers products. The
emergence of China as a major trading nation exacerbated these trends, and encouraged fragmentation
of production in East Asia (Gaulier et al., 2006), so that the growth of trade in intermediate goods
added to the proportion of intra-Asian trade in the countries total trade.

29

Regional cooperation agreements such as the Tumen River project, the Greater Mekong Subregion
or Central Asian Regional Economic Cooperation (CAREC) did not contain trade policy components.
REGIONALISM IN THE WORLD ECONOMY 937

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

which had espoused a global perspective up to about 1998, but then switched to
advocating regional agreements.

30

The switch may have reected completion of
WTO accession negotiations at which point China may have thought it had more
freedom of action. Another catalyst was the sense of lack of appreciation by the
USA for Chinas role in the Asian Crisis when it opposed Japans proposals for
an Asian Monetary Fund, and this cooling of relations was reinforced when the
USA bombed the Chinese embassy in Belgrade. In any case, China became
keener to negotiate with the ASEAN countries and to join the ASEAN+3 Chiang
Mai Initiative, to which Japan and South Korea (the other elements of the +3)
also reacted by embarking on negotiations for bilateral agreements.
What is the content of the East Asian trade agreements negotiated since 2000?
For China they signalled regional engagement. From a historical perspective the
ASEAN+3 grouping is a revival of the East Asian Economic Caucus, and it is
viewed with the same foreboding by neighbours who do not want to be excluded
and by Japan which fears Chinese hegemony in such a grouping.

31

Japanese
bilaterals have little impact; with Singapore there was little to liberalise, and with
Thailand the most contentious product, rice, was excluded. South Koreas cautious
approach to bilateral trade agreements is reected in the choice of partners, starting
with Chile. ASEAN is taking more serious steps to reduce internal trade barriers
in AFTA, but within the context of reduced external trade barriers and so far with
minimal deeper integration.

32

Since 2000 the dominant negotiating mechanism
with non-members has been bilateral rather than through the ASEAN+3 process.

33

30

This coincided with APECs failure to deliver Early Voluntary Sector Liberalisation in 199798,
suggesting that the Bogor Declarations goals might be unachievable and APEC a dead-end. The
post-1997 monetary integration also played a role, as Japan had raised the issue of a trade agreement
with Korea in 1998 (Feridhanusetyawan, 2005, p. 6), but the relative economic decline of Japan
and rise of China during the 1990s were the underlying stimuli for later more concrete outcomes,
e.g. the Japan-Singapore Economic Partnership Agreement which was concluded in October 2001
is often seen as impelled by Japans fear of loss of inuence to China (IISD, 2004, p. 25).

31

China was a sponsor of the idea of an East Asia summit, but by the time the rst summit was
held in Kuala Lumpur in December 2005, China-Japan relations were poor and China was irked
by Japans insistence on the participation of Australia, India and New Zealand, which contradicted
Chinas desire for a specically East Asian grouping. For the immediate future, Chinas regional
relations are likely to be focused on its relations with ASEAN.

32

The average MFN tariff of ASEAN members (apart from Cambodia, Laos and Vietnam, which
have an extended transition period to AFTA) is eight per cent or less. Preference margins are small
because the target is to reduce intra-AFTA tariffs to ve per cent or less (not necessarily to zero),
and sensitive products like Indonesias textile and petrochemical products, the Philippines cement
sector, or Malaysias cars are excluded from AFTA. The 1995 ASEAN Framework Agreement on
Services provides for voluntary commitments beyond GATS, but has made no signicant progress
(Feridhanusetyawan, 2005, p. 24).

33

An ASEAN-Korea agreement is stalled because Korea wants to exclude rice and Thailand
refuses to sign a deal without rice. Beyond the +3, ASEAN is negotiating a trade agreement with
India, but Indias opening position included 1,400 sensitive items which it wanted to exclude
from tariff cuts.
938 RICHARD POMFRET

2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007

Singapores bilaterals go beyond trade, and mainly concern nancial market
liberalisation, while Thai bilaterals seem to have been primarily to offer the
Prime Minister an international stage; to the extent that they create special trade
relationships, the bilateral agreements of Singapore and Thailand are anti-regionalism
because they dilute ASEAN trade ties. Beyond East Asia, Chinese negotiations
tend to be single-issue deals, e.g. in the China-Australia agreement China seeks
abolition of its non-market-economy status in anti-dumping calculations.

34

In
sum, the spaghetti bowl of recent East Asian RTAs makes for complicated artwork
(as, for example, in Feridhanusetyawan, 2005, pp. 1011), but the RTAs have little
economic impact.
35
In other parts of the world RTAs have had even less impact. The League of
Arab States dates from 1945, but even though the Arab League was mooted as
a common market in 1956 (i.e. before the EUs founding Six signed the Treaty
of Rome) and a Greater Arab Free Trade Area agreement was signed in 1997
there has been little implementation.
36
In Africa dozens of RTAs have been signed
but with little impact on trade. In South Asia, despite the existence of the South
Asian Association of Regional Cooperation (SAARC) since 1985 and a preferential
trade arrangement since 1995, the two largest countries, India and Pakistan, did
not even grant one another full MFN treatment; since the signing of the South
Asia Free Trade Area (SAFTA) agreement in 2004 relations are warmer, but still
appear to be subordinate to bilateral agreements with countries outside the region.
37
In West and Central Asia, especially since the dissolution of the USSR, many
RTAs have been signed, but few implemented. In all of these regions political
leaders appear to take a talk-is-cheap attitude to trade agreements, happy to sign
them at summit meetings and leave the details to lower ofcials who will bury
34
In the negotiations which began in May 2005 Australias main goals concerned market access
for services and for farm products, but China has created precedents which suggest that little will
be achieved in these areas, e.g. the China-ASEAN FTA deferred consideration of services for a
later date and the China-Chile FTA specically excluded wool even though Chile is an extremely
minor wool exporter.
35
Low (2004) and Feridhanusetyawan (2005) survey East Asian RTAs. Keeping track is not easy.
Dates may refer to announcement, signing or implementation, and draft RTAs may differ from nal
RTAs. There are also some confusing overlaps, e.g. the Trans-Pacic Strategic Economic Partnership
Agreement (TPSEPA) between New Zealand, Singapore, Brunei and Chile, is separate from the
Singapore-New Zealand bilateral agreement.
36
The 1981 Gulf Cooperation Council and the 1989 Arab Maghreb Union are the main existing
RTAs in the Arab world, but the former covers few people and the latter is split by political divisions.
Tunisia (1998), Morocco (2000), Jordan (2002) and Egypt (2004) have signed Euro-Mediterranean
Agreements with the EU, and the 2001 Agadir Declaration committed them to creating a free trade
area among themselves by 2006 (Dennis, 2006).
37
India has had bilateral negotiations with Thailand and Singapore, Pakistan has signed framework
agreements with China, Malaysia and the USA and is holding discussions with Indonesia, Laos,
Singapore and Thailand, and Sri Lanka signed a Trade and Investment Framework Agreement with
the USA in 2002 as a step towards a free trade agreement (Baysand et al., 2006).
REGIONALISM IN THE WORLD ECONOMY 939
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
the agreement when unpleasant consequences seem likely or political alliances
shift.
38
None of this has much consequence for the global trading system.
In sum, we observe different patterns in different parts of the world, which are
amalgamated under the rubric of regionalism but are in reality quite diverse. Should
this be a cause for concern? The key components of the multilateral trading system
are non-discrimination and transparency. Attempts to form seriously discriminat-
ing RTAs have foundered in Latin America and Africa, and failed to get off the
ground in Asia, largely because policymakers did not want to bear the trade
diversion costs of importing from inefcient producers in partner countries. If the
EU is treated as a single unit, as it is in WTO fora, then there is not much
discrimination due to RTAs.
39
Transparency has been a greater victim due to the
complexity of many RTAs.
40
7. CONCLUSIONS
Claims that the world economy is experiencing a dramatic increase in regionalism
are based on faulty measures and misrepresent the reality of an increasingly
integrated global trading system based on non-discriminatory trade policies.
Despite the increased attention being paid to regional arrangements, the hold
of multilateralism is stronger than ever as practically all trading nations have now
acceded to the WTO, with lower trade barriers and stronger trade dispute settlement
procedures than ever before.
41
Perceptions of WTO enfeeblement reect a tendency
of news reporting to highlight conict rather than accord. The end of the Multibre
Arrangement in December 2004 was a monumental step in global non-discriminatory
trade liberalisation which is surely good for global resource allocation and for
people who wear clothes, but the press coverage in early 2005 highlighted negative
effects on countries suffering from preference erosion (such as Bangladesh) and
the impact on producers in powerful nations. Even as the USA and EU were
negotiating safeguard measures against the surge of clothing imports from China,
38
The extreme version of the talk-is-cheap pattern is the CIS, where several hundred free trade
agreements, customs unions, common economic spaces, or other bilateral or plurilateral arrangements
have been announced among the 12 Soviet successor states since 1991. None of these proposals has
had a signicant impact on national trade policies or on trade ows.
39
The most important elements of discrimination in the current global trading system have come
from other than RTAs, e.g. quantitative trade restrictions such as the Multibre Arrangement
quotas or the voluntary export restraints which blossomed in the 1980s, or the US steel safeguard
policies of 2002 (Brown, 2004) or the use of special agricultural safeguards today (Hallaert, 2005).
40
Estevadeordal and Suominen (2003), whose catalogue of RoOs shows them to be often product-
specic and rarely consistent from one RTA to another, conclude that failure to harmonise RoOs
exacerbates hub-and-spoke relationships and is an obstacle to freer global trade.
41
The main non-members, Russia, Ukraine, Kazakhstan and perhaps Iran, are expected to join the
WTO within the next decade.
940 RICHARD POMFRET
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
little mention was made of the fact that these were legal under Chinas WTO
accession accord but limited in duration to 2008.
42
Other striking examples of the
increased rule of law in international trade since the creation of the WTO are the
ability of small countries to win cases against major trading nations (and have
the offending policies modied) and the willingness of the US Congress to amend
US tax law (on FISCs) to comply with a WTO judgment.
43
The most salient RTAs in the current world economy (the European Union, the
North American Free Trade Area, or Closer Economic Relations between Australia
and New Zealand) all have liberal external trade policies, so that they could properly
be called regional arrangements for matters beyond trade. In a world where tariffs
and simple non-tariff trade barriers have diminished, other trade costs come to
the fore, and as markets become more regionally or globally integrated there are
increasing pressures for harmonisation in a greater number of policy areas. In
this process, regional arrangements have a role to play as some policy regimes
may desirably be supra-national but sub-global. Regional arrangements may also
be testing grounds for innovations in policy coordination or harmonisation, and
hence act as building blocks towards identifying well-designed global policies.
This is not to argue for giving unrestricted carte blanche to beyond-trade
RTAs. They may be undesirable from a global welfare perspective and they may
impinge negatively on the multilateral trade regime as the increased complexity
of regional arrangements opens up opportunities for managed trade that can
benet insiders and become a stumbling block to progress at the global level.
Nevertheless, it is important to keep a sense of perspective. Deep integration may
affect trade but it goes beyond trade policy, and it is not in itself a sign of erosion
of the multilateral trading system. Bilateral agreements, which focus on, say,
aspects of nancial liberalisation to reduce a behind-the-border trade cost, in
essence differ little from agreements such as double-taxation treaties, which have
been signed for decades without being referred to as bilateral trade agreements
or FTAs.
The fundamental difculties in assessing RTAs today are the same as those
highlighted in the classic treatment by Viner (1950); the second-best nature of
42
Liu and Sun (2004) point out that action could be taken against Chinese clothing exports under
other WTO safeguard provisions after the specic textile provisions lapse at the end of 2008. My point
is that the MFA was a huge sectoral exception to multilateral trading rules and this no longer exists.
43
Venezuelas early victory in a petroleum-related case against the USA and the nding against
EU banana policies were landmark victories for poor countries against powerful WTO members.
Brazils 2005 victory in its cotton case against the USA is also a signicant example of action
within the WTO leading to reform of rich country policies which were supported by powerful
domestic lobbies and would not have been changed in response to bilateral complaints. Busch et al.
(2006) argue that the existence of the WTO dispute settlement mechanism discourages members
from initiating trade restrictions (US anti-dumping actions in their empirical study) of doubtful
WTO legality.
REGIONALISM IN THE WORLD ECONOMY 941
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
RTAs in terms of economic analysis and the interaction of politics and economics.
The second-best analysis (i.e. because world trade is already distorted, reducing
a distortion by preferential trade liberalisation may be welfare-improving or
welfare-reducing) is traditionally framed as trade creation versus trade diversion.
It most often appears in the contrast between the grand announcements of RTAs
by political leaders wishing to make a foreign policy impact or to indicate their
countries friendship, and the implementation record as policymakers are lobbied
by domestic producers or realise the costs of trade diversion.
44
Second-best con-
siderations can also be seen in debates over whether RTAs produce benecial
WTO-Plus outcomes. All RTAs claim to be WTO consistent, but the imprecision
of GATT Article XXIV and GATS Article V mean that this is not always clear,
and WTO-Plus may be undesirable if it precludes negotiation of broader superior
outcomes.
Politics have driven some of the major developments highlighted in the previous
section, e.g. the EU, FTAA and the competition between China and Japan for
Asian hegemony. This can have large and unstoppable economic consequences
for the global trading system (as in the road from the Treaty of Rome to the EU)
or it can have negligible economic consequences (as in the current stand-off in
East Asia). At times the outcome may be somewhere in between (does NAFTA
mildly reinforce market-driven integration trends behind low external trade barriers,
as in ASEAN, or does it create a trading bloc?), but the eventual outcome is
likely to be one of the extremes. Politically motivated regional integration leads
to the RTA becoming a country rather than a region (as happened earlier in
Germany, Canada, Italy or Australia, and may be happening with the EU today).
In large countrysmall country RTAs, the large country may draw back from RTAs
with small partners as their aws as a foreign policy instrument become apparent
(as with the EUs pyramid of preferences) or be unwilling to offer sufcient economic
incentives to the small country to make the RTA meaningful (as in recent US
bilateral trade agreements).
45
The exceptions among large+small country RTAs
are quasi-colonial, in which case the small partner is scarcely a country.
Regionalism is difcult to measure. The most popular approaches, counting
RTAs notied to the WTO or measuring the proportion of world trade between
44
RTAs have failed when they were based on a regional form of import substitution (e.g. the
customs unions agreed among developing countries in Latin America or Africa in the 1950s and
1960s or RTAs within the CIS in the 1990s and 2000s). They inevitably led to conict, because
each member wanted a regional market for its own inefcient industries but was unwilling to buy
the expensive or poor quality import-substitutes being produced by their partners.
45
The economic side to the sustainability of large countrysmall country RTAs is that interest
groups in the large country which are strong enough to maintain external trade barriers will prevent
lowering of these barriers on a preferential basis if there will be any signicant increase in trade,
while the RTA is useless for the small country if it cannot generate any increase in trade. If the
only increase in bilateral trade is due to trade diversion, then the disadvantaged third countries are
likely to object (as in the EU banana case).
942 RICHARD POMFRET
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
RTA signatories, are clearly inadequate. The desirability of RTAs, which due to
their second-best nature is impossible to determine a priori, is also difcult to
assess. Nevertheless, the threat to the multilateral trading system does not appear
to be as large as is often reported, because the long-term dynamics of RTAs lead
either to state formation, which is important but rare, or to ineffectiveness, which
is the fate of the vast majority of RTAs.
APPENDIX
RTAs Notied to the WTO from 1 January, 1995, to the End of 2006
Agreement Notication Date WTO Provisions Entry into Force
EC Accession (Austria,
Finland, Sweden)
20 January 1995 Article XXIV 1/1/95
EC Accession (Austria,
Finland, Sweden)
20 January GATS Art. V 1/1/95
NAFTA 1 March GATS Art. V 1/1/94
COMESA 29 June Enabling Clause 8/12/94
EC (Treaty of Rome) 10 November GATS Art. V 1/1/58
CER 22 November GATS Art. V 1/1/89
ECTurkey 22 December Article XXIV 1/1/96
IcelandFaroe Islands 23 January 1996 Article XXIV 1/7/93
SwitzerlandFaroe Islands 8 March Article XXIV 1/3/95
NorwayFaroe Islands 13 March Article XXIV 1/7/93
ECRomania 9 October GATS Art. V 1/2/95
EEA 10 October GATS Art. V 1/1/94
CanadaIsrael 23 January 1997 Article XXIV 1/1/97
ECFaroe Islands 19 February Article XXIV 1/1/97
ECBulgaria 25 April GATS Art. V 1/2/95
ECPalestinian Authority 30 June Article XXIV 1/7/97
CanadaChile 26 August Article XXIV 5/7/97
RomaniaMoldova 24 September Article XXIV 1/1/95
CanadaChile 13 November GATS Art. V 5/7/97
CEFTA Accession (Romania) 8 January 1998 Article XXIV 1/7/97
ECAndorra 9 March Article XXIV 1/7/91
RomaniaTurkey 18 May Article XXIV 1/2/98
IsraelTurkey 18 May Article XXIV 1/5/97
ECTunisia 23 March 1999 Article XXIV 1/3/98
CEFTA Accession (Bulgaria) 24 March Article XXIV 1/1/99
EAEC 21 April Article XXIV 8/10/97
BulgariaTurkey 4 May Article XXIV 1/1/99
Kyrgyz RepublicUzbekistan 15 June Article XXIV 20/3/98
Kyrgyz RepublicUkraine 15 June Article XXIV 19/1/98
Kyrgyz RepublicRussia 15 June Article XXIV 24/4/93
Kyrgyz RepublicMoldova 15 June Article XXIV 21/11/96
EFTAPalestinian Authority 21 September Article XXIV 1/7/99
Kyrgyz RepublicKazakhstan 29 September Article XXIV 11/11/95
CIS 1 October Article XXIV 30/12/94
MSG 7 October Enabling Clause 22/7/93
REGIONALISM IN THE WORLD ECONOMY 943
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
BulgariaFYROM 19 February 2000 Article XXIV 1/1/00
WAEMUUEMOA 3 February Enabling Clause 1/1/00
EFTAMorocco 18 February Article XXIV 1/12/99
ECMorocco 1 August Article XXIV 1/7/00
CEMAC 29 September Enabling Clause 24/6/99
EAC 11 October Enabling Clause 7/7/00
ECIsrael 7 November Article XXIV 1/6/00
ECMorocco 8 November Article XXIV 1/3/00
ECSouth Africa 21 November Article XXIV 1/1/00
Kyrgyz RepublicArmenia 4 January 2001 Article XXIV 27/10/95
TurkeyFYROM 22 January Article XXIV 1/9/00
EFTAFYROM 31 January Article XXIV 1/1/01
GeorgiaUkraine 21 February Article XXIV 4/6/96
GeorgiaTurkmenistan 21 February Article XXIV 1/1/00
GeorgiaRussia 21 February Article XXIV 10/5/94
GeorgiaKazakhstan 21 February Article XXIV 16/7/99
GeorgiaAzerbaijan 21 February Article XXIV 10/7/96
GeorgiaArmenia 21 February Article XXIV 11/11/98
MexicoIsrael 8 March Article XXIV 1/7/00
ChileMexico 8 March Article XXIV 1/8/99
ChileMexico 14 March GATS Art. V 1/8/99
EFTAMexico 22 August GATS Art. V 1/7/01
EFTAMexico 22 August Article XXIV 1/7/01
New ZealandSingapore 19 September GATS Art. V 1/1/01
New ZealandSingapore 19 September Article XXIV 1/1/01
ECFYROM 21 November Article XXIV 1/6/01
EFTACroatia 22 January 2002 Article XXIV 1/1/02
EFTAJordan 22 January Article XXIV 1/1/02
USAJordan 5 March Article XXIV 17/12/01
ChileCosta Rica 14 May Article XXIV 15/2/02
ChileCosta Rica 24 May GATS Art. V 15/2/02
ECMexico 21 June GATS Art. V 1/3/01
IndiaSri Lanka 27 June Enabling Clause 15/12/01
USAJordan 18 October GATS Art. V 17/12/01
JapanSingapore 14 November Article XXIV 30/11/02
JapanSingapore 14 November GATS Art. V 30/11/02
EFTA 3 December GATS Art. V 1/6/02
ECJordan 20 December Article XXIV 1/3/02
ECCroatia 20 December Article XXIV 1/3/02
CanadaCosta Rica 17 January 2003 Article XXIV 1/11/02
EFTASingapore 24 January Article XXIV 1/1/03
EFTASingapore 24 January GATS Art. V 1/1/03
CARICOM 18 February GATS Art. V 1/7/97
BulgariaIsrael 14 April Article XXIV 1/1/02
ECLebanon 4 June Article XXIV 1/3/03
TurkeyCroatia 8 September Article XXIV 1/7/03
TurkeyBosnia & Herzegovina 8 September GATS Art. V 1/7/03
SingaporeAustralia 1 October Article XXIV 28/7/03
SingaporeAustralia 1 October GATS Art. V 28/7/03
Agreement Notication Date WTO Provisions Entry into Force
APPENDIX Continued
944 RICHARD POMFRET
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
CroatiaBosnia & Herzegovina 6 October Article XXIV 1/1/01
USAChile 19 December Article XXIV 1/1/04
USAChile 19 December GATS Art. V 1/1/04
USASingapore 19 December Article XXIV 1/1/04
USASingapore 19 December GATS Art. V 1/1/04
ChinaHong Kong 12 January 2004 Article XXIV 1/1/04
ChinaHong Kong 12 January GATS Art. V 1/1/04
ChinaMacao 12 January Article XXIV 1/1/04
ChinaMacao 12 January GATS Art. V 1/1/04
ECChile 18 February Article XXIV 1/2/03
ChinaEl Salvador 17 March GATS Art. V 1/6/02
ChinaEl Salvador 16 February Article XXIV 1/6/02
CEFTA Accession (Croatia) 3 March Article XXIV 1/3/03
CroatiaAlbania 31 March Article XXIV 1/6/03
AlbaniaBulgaria 31 March Article XXIV 1/9/03
AlbaniaKosovo 8 April Article XXIV 1/10/03
KoreaChile 19 April Article XXIV 1/4/04
KoreaChile 19 April GATS Art. V 1/4/04
EU Enlargement 28 April GATS Art. V 1/5/04
EU Enlargement 30 April Article XXIV 1/5/04
ArmeniaUkraine 27 July Article XXIV 18/12/96
ArmeniaKazakhstan 27 July Article XXIV 25/12/01
ArmeniaMoldova 27 July Article XXIV 21/12/95
ArmeniaRussia 27 July Article XXIV 25/3/93
ArmeniaTurkmenistan 27 July Article XXIV 7/7/96
Bangkok Agreement
Accession (China)
29 July Enabling Clause 1/1/02
SADC 9 August Article XXIV 1/9/00
ECEgypt 4 October Article XXIV 1/6/04
AlbaniaSerbia & Montenegro 19 October Article XXIV 1/9/04
EFTAChile 10 December Article XXIV 1/12/04
EFTAChile 10 December GATS Art. V 1/12/04
AlbaniaRomania 14 December Article XXIV 1/1/04
AlbaniaBosnia & Herzegovina 14 December Article XXIV 1/12/04
AlbaniaFYROM 14 December Article XXIV 1/7/02
AlbaniaMoldova 20 December Article XXIV 1/11/04
ASEANChina 21 December Enabling Clause 1/7/03
USAustralia 23 December Article XXIV 1/5/05
USAustralia 23 December GATS Art. V 1/5/05
ThailandAustralia 5 January 2005 Article XXIV 1/1/05
ThailandAustralia 5 January GATS Art. V 1/1/05
MoldovaBulgaria 28 January Article XXIV 1/12/04
MoldovaBosnia & Herzegovina 28 January Article XXIV 1/5/04
MoldovaSerbia & Montenegro 28 January Article XXIV 1/9/04
MoldovaCroatia 31 January Article XXIV 1/10/04
MoldovaFYROM 31 January Article XXIV 1/12/04
RomaniaBosnia & Herzegovina 14 February Article XXIV 1/7/04
RomaniaSerbia & Montenegro 14 February Article XXIV 1/7/04
RomaniaFYROM 14 February Article XXIV 1/1/04
Agreement Notication Date WTO Provisions Entry into Force
APPENDIX Continued
REGIONALISM IN THE WORLD ECONOMY 945
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
BulgariaBosnia & Herzegovina 11 March Article XXIV 1/12/04
BulgariaSerbia & Montenegro 11 March Article XXIV 1/6/04
PanamaEl Salvador 18 March Article XXIV 11/4/03
CroatiaFYROM 1 April Article XXIV 30/10/97
PanamaEl Salvador 5 April GATS Art. V 11/4/03
JapanMexico 22 April Article XXIV 1/4/05
JapanMexico 22 April GATS Art. V 1/4/05
RomaniaIsrael 25 April Article XXIV 1/7/01
FYROMBosnia & Herzegovina 11 May Article XXIV 15/7/02
EFTATunisia 7 June Article XXIV 1/6/05
ECOWAS 26 September Enabling Clause 1993
TurkeyTunisia 15 September Article XXIV 1/7/05
TurkeyPLO 15 September Article XXIV 1/6/05
CroatiaSerbia & Montenegro 22 September Article XXIV 1/7/04
ECChile 1 November GATS Art. V 1/3/05
MexicoNicaragua 2 November Article XXIV 1/7/98
MexicoNicaragua 2 November GATS Art. V 1/7/98
ThailandNew Zealand 2 December Article XXIV 1/7/05
ThailandNew Zealand 2 December GATS Art. V 1/7/05
USMorocco 16 January 2006 Article XXIV 1/1/06
USMorocco 16 January GATS Art. V 1/1/06
TurkeyMorocco 21 February Article XXIV 1/1/06
KoreaSingapore 24 February Article XXIV 2/3/06
KoreaSingapore 24 February GATS Art. V 2/3/06
Dominican Rep.
CAFTAUSA
28 March Article XXIV 1/3/06
Dominican Rep.
CAFTAUSA
28 March GATS Art. V 1/3/06
El SalvadorMexico 30 May Article XXIV 15/3/01
El SalvadorMexico 30 May GATS Art. V 15/3/01
HondurasMexico 12 July Article XXIV 1/6/01
HondurasMexico 12 July GATS Art. V 1/6/01
GuatemalaMexico 12 July Article XXIV 15/3/01
GuatemalaMexico 12 July GATS Art. V 15/3/01
JordanSingapore 12 July Article XXIV 22/8/05
JordanSingapore 12 July GATS Art. V 22/8/05
JapanMalaysia 13 July Article XXIV 13/7/06
JapanMalaysia 13 July GATS Art. V 13/7/06
EFTAKorea 28 August Article XXIV 1/9/06
EFTAKorea 28 August GATS Art. V 1/9/06
Costa RicaMexico 11 September Article XXIV 1/1/95
Costa RicaMexico 15 September GATS Art. V 1/1/95
USABahrain 15 September Article XXIV 1/8/06
USABahrain 15 September GATS Art. V 1/8/06
Source: http://www.wto.org accessed 19 January, 2007.
Agreement Notication Date WTO Provisions Entry into Force
APPENDIX Continued
946 RICHARD POMFRET
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
REFERENCES
Anderson, J. and E. van Wincoop (2004), Trade Costs, Journal of Economic Literature, 42, 3,
691751.
Baysan, T., A. Panagariya and N. Pitigala (2006), Preferential Trading in South Asia, World Bank
Policy Research Working Paper WPS 3813 (Washington, DC).
Bhagwati, J. (1995), US Trade Policy: The Infatuation with Free Trade Areas, in J. Bhagwati and
A. Krueger (eds.), The Dangerous Drift to Preferential Trade Agreements (Washington, DC:
American Enterprise Institute).
Bhagwati, J. and H. Patrick (1990), Aggressive Unilateralism (Ann Arbor, MI: University of Michigan
Press).
Brown, C. (2004), How Different are Safeguards from Antidumping? Evidence from US Trade Policies
Towards Steel, Working Paper (Brandeis University, Available at http://people.brandeis.edu/~cbown/
papers/steel_mfn.pdf).
Busch, M., R. Raciborski and E. Reinhardt (2006), Does the Rule of Law Matter? The WTO and
US Antidumping Investigations, Working Paper (Georgetown University, Available at http://
www.georgetown.edu/users/mlb66/AD.pdf).
Candau, F. and S. Jean (2005), What are EU Trade Preferences Worth for Sub-Saharan Africa and
Other Developing Countries? CEPII Working Paper No. 2005-19 (Centre dEtudes Prospectives
et dInformations Internationales, Paris).
Crawford, J. and R. Fiorentino (2005), The Changing Landscape of Regional Trade Agreements,
WTO Discussion Paper No. 8 (World Trade Organisation, Geneva).
Dennis, A. (2006), The Impact of Regional Trade Agreements and Trade Facilitation in the Middle East
and North Africa Region, World Bank Policy Research Working Paper WPS 3837 (Washington, DC).
Estevadeordal, A. and K. Suominen (2003), Rules of Origin: A World Map, Paper presented at
a conference on Regional Trade Agreements in Comparative Perspective: Latin America and
the Caribbean and Asia-Pacic, organised by the Pacic Economic Cooperation Council (PECC)
and the Latin America/Caribbean and Asia/Pacic Economic and Business Association (LAEBA)
(Washington, DC, 2223 April).
Feridhanusetyawan, T. (2005), Preferential Trade Agreements in the Asia-Pacic Region,
International Monetary Fund Working Paper No. 05/149 (Washington, DC).
Gaulier, G., F. Lemoine and D. nal-Kesenci (2006), Chinas Emergence and the Reorganisation
of Trade Flows in Asia, Centre dEtudes Prospectives et dInformations Internationales Working
Paper No. 2006- 05 (Paris).
Hallaert, J.-J. (2005), Special Agricultural Safeguards: Virtual Benets and Real Costs Lessons
for the Doha Round, International Monetary Fund Working Paper No. 05/131 (Washington, DC).
IISD (2004), The Rush to Regionalism: Sustainable Development and Regional/Bilateral Approaches
to Trade and Investment Liberalization, Paper prepared for the International Development
Research Centre, Canada (Available at http://www.iisd.org).
Krueger, A. (1999), Free Trade Agreements as Protectionist Devices: Rules of Origin, in J. Melvin,
J. Moore and R. Riezman (eds.), Trade, Theory and Econometrics: Essays in Honor of John S.
Chipman (London: Routledge), 91102.
Lawrence, R. (1996), Regionalism, Multilateralism, and Deeper Integration (Washington, DC:
Brookings Institution Press).
Liu, H. and L. Sun (2004), Beyond the Phaseout of Quotas in the Textile and Clothing Trade:
WTO-Plus Rules and the Case of US Safeguards against Chinese Exports in 2003, Asia-Pacic
Development Journal, 11, 1, 4971.
Low, L. (2004), A Comparative Evaluation and Prognosis of Asia Pacic Bilateral and Regional
Trade Arrangements, Asian-Pacic Economic Literature, 18, 1, 111.
Messerlin, P. (2005), The Directive on Services: Rent Seekers Strike Back, Intereconomics, 40,
3, 12024.
Olson, M. (1965), The Logic of Collective Action (Cambridge, MA: Harvard University Press).
Patterson, G. (1966), Discrimination in International Trade: The Policy Issues, 19451965 (Princeton,
NJ: Princeton University Press).
REGIONALISM IN THE WORLD ECONOMY 947
2007 The Author
Journal compilation Blackwell Publishing Ltd. 2007
Pomfret, R. (1985), Discrimination in International Trade: Extent, Motivation and Implications,
Economia Internazionale, 38, 1, 84965.
Pomfret, R. (1986), The Trade-diverting Bias of Preferential Trading Arrangements, Journal of
Common Market Studies, 25, 4, 10917.
Pomfret, R. (1988), Unequal Trade (Oxford: Basil Blackwell).
Pomfret, R. (1996), Sub-regional Economic Zones, in B. Bora and C. Findlay (eds.), Regional
Integration and the Asia Pacic (Melbourne: Oxford University Press), 20722.
Pomfret, R. (2001), The Economics of Regional Trading Arrangements (Oxford: Oxford University
Press).
Pomfret, R. (2005), Sequencing Trade and Monetary Integration: Issues and Application to Asia,
Journal of Asian Economics, 16, 1, 10524.
Pomfret, R. (2006), Regional Trade Agreements, in M. Fratianni and A. Rugman (eds.), Regional
Economic Integration (Amsterdam: Elsevier), 3954.
Schiff, M. and L. A. Winters (1998), Dynamics and Politics in Regional Integration Arrangements:
An Introduction, World Bank Economic Review, 12, 2, 17795.
Schiff, M. and L. A. Winters (2003), Regional Integration and Development (New York: Oxford
University Press, for the World Bank).
Viner, J. (1950), The Customs Union Issue (New York: Carnegie Endowment for International
Peace).
World Bank (2005), Global Economic Prospects 2005: Trade, Regionalism, and Development
(Washington, DC).
ISSN 0143-6597 print/ISSN 1360-2241 online/03/020217-18 2003 Third World Quarterly
DOI: 10.1080/0143659032000074565 217
Third World Quarterly, Vol 24, No 2, pp 217234, 2003
If the sceptics and doomsayers are to be believed, the prognosis for Latin
American regionalist projects is not encouraging. The limited achievements to
date of most subregional blocs, the continuing vitality of bilateralism, the threat
from the wider hemispheric integration project in the Americas, enduring
political instability in various countries across the region, the impact of global
financial volatility, and recurrent economic crisis are not, at least according to
dominant understandings, conditions conducive to the survival and health of
regional integration initiatives. The Mercosur
1
is frequently seen as likely either
to disintegrate under its own weight or alternatively to be swallowed up into
whatever sort of Free Trade Area of the Americas (FTAA) might come into being
in the next few years; likewise the Andean, Central American and Caribbean
blocs are commonly depicted as in a process of stagnation, and equally likely to
lose their rationale should hemispheric free trade be negotiated successfully.
Observation of the splintering of the Mercosur, particularly, has meant that much
of the hubris surrounding new or open regionalism in the early 1990s has
given way to a scepticism about its viability and future prospects. At least at this
level, the parallels with contemporary discussions about APEC and ASEAN,
reflected in the present collection of papers, are striking.
What I wish to do here is not only take issue with the idea that the Mercosur is
at deaths door, but also to suggest that the endless arguments about whether it is
The rise and fall of open
regionalism? Comparative
reflections on regional governance in
the Southern Cone of Latin America
NICOLA PHILLIPS
ABSTRACT This article argues that the original framework of open regional-
ism underpinning the Mercosur is petering out, and consequently the regional
governance project in the Southern Cone is undergoing a process of redefinition.
The article seeks to understand the nature of this redefinition, and contends that
this task requires a re-orientation of some of the prevalent ways in which the
study of regionalism is approached. Specifically, it highlights the limitations of
an understanding of regionalism merely as a reflection of domestic processes,
and instead argues for a greater attention to processes of regionalisation and
their complex relationship with both regionalism and domestic political economy.
Nicola Phillips is in the Department of Government, University of Manchester, Manchester, UK. E-mail:
nicola.phillips@man.ac.uk.
NICOLA PHILLIPS
or not are not the most fruitful way of understanding contemporary regional
governance in the Southern Cone. On an empirical level, I argue that, rather
than being in a process of obsolescence, the Mercosur project is undergoing an
important redefinition and that this is producing, with some parallels to the
process underway in Asia, a rather different kind of regionalism from the open
regionalism model which prevailed in the 1990s. On a conceptual level, more-
over, I suggest that understanding the nature of this redefinition demands a
reorientation of some of the prevalent ways in which the study of regionalism is
approached. Most especially, domestic political economy is usually taken as
constitutive of regional political economy and consequently regional political
economy is depicted simply as an extension, or a magnification, of domestic
processes. The result is the reinforcement of a rather narrow focus on formal
state-led regionalist projects, which obscures the social processes of regional-
isation that surround and overlap with them,
2
and indeed has been pivotal in
producing what I consider to be rather misleading accounts of the Mercosurs
imminent demise. What is needed, I suggest, is an understanding of regional
political economy as involving a set of dynamics which reach beyond formal
regionalist, state-led processes, through which lens we can better understand the
reconfiguration of regional governance in the Southern Cone.
Open regionalism in the Southern Cone
As in Asia, the new regionalism in Latin America has conformed broadly with
a model of open regionalism, predicated on a perception of the merits of uni-
lateral trade liberalisation for increased and more effective participation in the
global economy. The label open regionalism, however, does not tell us very
much else about the sorts of regionalism that have emerged on the basis of this
broad rationale. Here, as Kanishka Jayasuriya argues in his contribution to this
issue, a regional governance framework offers significantly more value, par-
ticularly to a comparative exercise. Let us set out quickly the four central
elements he outlines as comprising a regional governance project:
1. a stable set of international economic strategies;
2. a distinctive set of governance structures which enables regional economic
governance;
3. a set of normative or ideational constructs that not only makes possible a
given set of regional governance structures but also makes possible the very
definition of the region;
4. a convergence of domestic coalitions and political economy structures across
the region, which would facilitate the coherent construction of regional
political projects.
When taken to the Southern Cone, these four components proffer not only useful
comparisons with Asian regionalism, but they also constitute a useful starting
point for looking at the pressures under which the Mercosur project laboured
during the 1990s. The first of these, as already suggested, offers a direct
similarity with the East Asian region in the adoption of an open regionalism
218
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
model of trade liberalisation. Despite some significant sectoral variation, this
model filled its brief relatively well, especially in the early years of the Mercosur,
as a mechanism for reinforcing domestic trade liberalisation as well as spurring a
significant growth in intra- and extra-Mercosur trade. Between 1990 and 1995,
for example, exports increased by an annual average of 28.4% and imports by
27.8%. Between 1990 and 1996 Mercosurs share of total regional exports
increased from 8.9% to 22.6% (INTAL, 1997: ii). Nevertheless, one of the most
notable features of the Mercosur is that it remains significantly inward-looking,
measured in terms of trade relative to GDP. While the percentages increased
consistently through the 1990s, the figures in Table 1 still demonstrate that the
impact of the open regionalism strategy was not to make the region appreciably
more open than in its pre-Mercosur days. In Brazil and Argentina especially,
the internal market remains considerably more important than the external sector.
The second element of the framework also suggests some similarities between
Southern Cone and Asian regionalism, in that the governance structures in both
have remained largely informal rather than rules-based. The Mercosur is institu-
tional structure, as has often been noted, is wholly intergovernmental rather than
supranational, and does not rest on an extensive legal framework similar to that
of the NAFTA. Rather, while a number of treaties and agreements underpin the
219
TABLE 1
Selected trade openness measures, 1990-99 (%)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Imports/GDP
W Hemisphere 9.9 9.5 10.2 10.5 11.2 11.7 11.9 12.4 12.5 13.3
NAFTA 10.2 9.8 9.3 9.7 9.9 11.0 11.2 11.3 11.9 11.9
LAC 10.1 8.2 10.2 11.3 10.8 12.0 12.3 12.5 14.9 19.7
LAC excl. Mexico 8.0 7.4 10.2 10.7 10.4 11.0 10.8 11.9 11.7 13.8
Mercosur 4.7 4.2 6.3 6.9 7.5 7.6 7.7 8.7 8.6 9.6
Andean
Community 12.5 13.7 16.4 16.9 15.3 15.8 15.2 15.8 15.4 12.8
CARICOM 36.3 40.2 41.3 35.9 40.5 45.3 39.5 45.5 n/a n/a
CACM 24.2 24.6 23.6 26.6 25.8 24.6 27.6 25.4 27.7 33.9
Exports/GDP
W Hemisphere 8.5 8.3 8.5 8.5 9.4 10.3 10.5 10.8 10.2 10.6
NAFTA 8.1 8.2 8.3 8.2 9.2 10.3 10.5 10.9 10.3 10.3
LAC 12.3 9.9 11.3 11.2 11.6 13.2 13.8 14.0 13.4 19.7
LAC excl. Mexico 11.3 8.8 10.8 10.5 10.5 10.2 10.4 10.6 9.5 13.3
Mercosur 7.5 5.7 7.8 7.8 7.5 7.1 7.0 7.3 7.3 8.9
Andean
Community 23.0 18.9 17.1 16.9 17.1 15.8 18.8 17.2 13.5 15.7
CARICOM 30.5 28.0 27.4 21.9 32.6 32.0 27.9 28.5 16.9 n/a
CACM 15.9 16.1 15.5 14.7 15.0 16.5 17.7 17.0 19.8 20.9
Source: IDB Integration and Regional Programs Dept, Integration and Trade in the Americas,
December 2000.
NICOLA PHILLIPS
regional economic strategies of the Mercosur, the latter have been marked by an
important degree of ad hoc decision making, particularly in the progressively
frequent instances of violations by member countries of core agreements in times
of crisis. In part this highly politicised and unstable set of governance structures
is engendered by the customs union model which underpins the Mercosur project
approximates and which, in contrast to a free trade area model, requires the
development of policy harmonisation beyond a commitment to the removal of
barriers to market access (Bernier & Roy, 1999: 73). Associated governance
projects are thus in theory defined largely by the political negotiation of policy
harmonisation and the construction of the institutions necessary to sustain such
an arrangement. In good part also, the intergovernmentalism of the Mercosur
reflects an ingrained Brazilian reticence on the matter of institutionalisation, as
well as the anti-statist thrust of the manner in which neoliberalism was pursued in
Argentina under the Menem governments of the 1990s. The point, at any rate, is
that the Mercosur project lacks any form of robust institutionalisation that might
facilitate a more rules-based governance structure.
The third and fourth elements of Jayasuriyas frameworkrelating to
ideational constructs and domestic political economy structuresare the most
important for our purposes here, and can be taken in conjunction with each other.
In contrast with the East Asian region, the definition of the Southern Cone
region has not been approached in cultural terms; indeed, one of the notable
features of Southern Cone regionalism has been the absence of the sort of under-
lying regional identity which is found, to a greater or lesser extent, in a number
of other regional governance projects in the Americas.
3
The ideational constructs
that have underpinned Southern Cone regionalism have been of the sort which do
not lend themselves obviously to the task of defining a regionnamely, the ideo-
logical constructs that derive from the broadest of commitments to democracy
and neoliberalism. Particularly in respect of the neoliberal ideational framework,
moreover, the divergences between Southern Cone countries have been central to
the fragmentation of the incipient project of regional governance and, indeed,
have been inimical to a convergence of domestic political economy structures
and domestic coalitions of the sort envisaged in Jayasuriyas point 4. Notwith-
standing important points of diversity within the Asian region, the emergence of
a model of embedded mercantilism represented a relatively robust uniformity
between domestic political economies. While the same might be said of the Latin
American region in the widespread adoption of a roughly Anglo-American
neoliberalism, a suggestion of uniformity is highly misleading, and particularly
so in the context of the Southern Cone, reflecting both historicalinstitutional
specificities and the highly variegated relationships of the national economies
with the world economy and globalisation processes. A full account of these
divergences between domestic political economy structures is beyond the scope
of this paper, but the relevant point is that they have been constitutive of sharply
contrasting visions of regionalism between the member countries of the
Mercosur, to the extent that there has not been a solid underlying ideational or
normative foundation for the regional governance project.
In this respect one of the principal cleavages relates to the nature of the
Brazilian political economy. On the one hand, the relationship of the state with
220
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
foreign capital has been significantly at variance with that of neighbouring
countries, in that external financing over the course of the 1990s was more
abundantly and readily available to Brazil than to most other Latin American
economies. While most countries were obliged to exercise fiscal responsibility in
order to attract capital, investment flowed into Brazil irrespective of conditions in
which bankrupt state banks continued to issue credit and in which the Central
Bank remained one of the least independent in the region (Kingstone, 1999: 136).
Given that the rationale for regionalism rested on the twin pillars of commercial
expansion and the attraction of foreign investment funds, the impulsion towards
the Mercosur was thus notably less strong for Brazil than it was for its partners.
On the other hand, Brazil is distinguished in the subregion by its diversified trade
structure and the volume of its extra-regional trade, to the extent that even its
commercial interests are much less linked with the regional marketplace than
those of neighbouring countries. For these reasons, the new multilateral round of
trade negotiations is of considerably more concern to Brazil than regional
integration. Indeed, the reticence of the Brazilian government in the early days of
the Mercosurand more recently towards the hemispheric integration project
can be explained in large part by the potential trade-off it represents with
multilaterally agreed liberalisation provisions in the World Trade Organization
(WTO) (de Paiva Abreu, 2003: 23). Brazilian engagement with regional
integration, in this sense, needs to be understood as motivated by strategic and
political goals, most of which relate to the construction of subregional leadership
as a means of mediating the hegemony of the USA in the hemispheric and multi-
lateral arenas. Certainly this strategic vision of the Mercosur became con-
siderably more robust as the hemispheric integration project picked up speed in
the later part of the 1990s, along with negotiations for economic co-operation
with the European Union (EU). The Brazilian indifference to regionalism of the
mid-1990s has thus been progressively replaced by an activism orientated
towards strengthening the Mercosur as a strategic and political platform (see
Phillips, 2000: 393394).
In Argentina and the smaller member countries, as suggested, the much greater
dependence on the regional marketplace, together with the more pronounced
dependence on and vulnerability to external capital flows, have meant that
participation in the Mercosur has been dictated far more by economic necessity
than was the case for Brazil. The Argentine vision of regionalism consequently
has been expounded by governmental actors as resting on the expansion of the
membership of the regional bloc, and the widening in this sense of the open
regionalism project. While sharing the goal of deepening regionalism,
Argentine positions have consistently been orientated also towards an extension
of the Mercosur market, or conversely towards opening extra-regional markets
by means, primarily, of inter-bloc negotiations. The Uruguayan and Paraguayan
focus has fallen somewhere between the deepening and expansion options,
but their principal concern, not surprisingly, has been with the need for institu-
tionalisation in order to ensure adequate representation of their interests in a
process dominated by the interaction of Argentina and Brazil. The dominance
of primary and agricultural exports in the three smaller member countries, in
addition, shapes a rather different set of structural and negotiating imperatives in
221
NICOLA PHILLIPS
the regional project from those of the Brazilian government and sections of the
Brazilian business community. In a nutshell, the interests of the latter are tied
principally to trade concerns, conforming closely with the open regionalism
rationale of using unilateral bloc-driven liberalisation to propel reciprocal liberal-
isation in other markets and at other levels. The interests of the Argentine,
Uruguayan and Paraguayan governments are dictated by a broader set of
developmental imperatives, of which the attraction of capital and the promotion
of industrialisation are foremost.
The upshot, in sum, is that there has been little convergence of domestic
political economy structures in the Mercosur, and certainly no underlying
model such as that of embedded mercantilism from which a coherent and stable
set of associated international strategies might have arisen. Indeed, the accelera-
tion of political conflict and dispute over the course of the 1990s suggests that, if
anything, the underlying divergences between domestic coalitions and political
economy structures have become more, rather than less, pronounced, to the
extent that the associated strategies of open regionalism have become less, rather
than more, viable. Certainly the progress made over the 1990s towards a stable
regional governance project was not impressive. By the start of the 2000s, the
Mercosur still constituted a very imperfect customs union, which had made
significant strides in the removal of tariff barriers to trade and the attraction of
FDI, but precious little progress in basic areas such as the harmonisation of
customs procedures, and in important areas such as trade in services, exchange
rate co-ordination, intellectual property, government procurement, the free move-
ment of workers, and institutionalisation (Phillips, 2001: 568). For a time in the
latter part of the 1990s, the movement by the Brazilian government towards a
greater privileging of the Mercosur in its foreign and foreign economic strategies
suggested a convergence, at least, on a commitment to the regional governance
project. Given that this commitment was premised on significantly divergent
motives and interests, however, it did little to paper over the evident fissures in
the bloc and certainly did not approximate a convergence of the disparate visions
of regionalism. To this extent, in some similarity to the manner in which
responses to financial crisis in Asia pulled apart the domestic commonalities
underpinning APEC and the East Asian region, the lack of any such robust
commonalities in the Southern Cone region has meant that the regionalist project
has remained distinctly shallow and fragile.
Two more conjunctural factors come into play at this point. The first relates to
the financial and economic crises that have dominated the landscape of the
Southern Cone since the late 1990s, first with the Brazilian devaluation of 1999,
and then more profoundly with the Argentine default and devaluation of 2001,
and its knock-on effects in Uruguay and Brazil in mid-2002. The effect has been
to undermine further the prospects for a convergence of domestic coalitions, and
also to fracture further the consensus surrounding the Mercosur itself. The
Uruguayan government, particularly, appears to have started down a Mercosur-
sceptic path, opening a rift with the rather more optimistic Brazilian vision of
the future of regionalism. Uruguayan President Batlle has branded ideas of a
common currency for the Mercosur as absolutely impossible (La Nacin, 27
March 2002), and the government showed little hesitation in 2002 in imple-
222
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
menting counter-measures against the impact of the Argentine devaluation.
Moreover, the Uruguayan government became more strident in its preference for
an FTAA over the subregional bloc at the start of 2002, and in the interim for
bilateral relations with the USA. An eagerness to engage in bilateral negotiations
has also been in evidence in Argentina, and Chile signed a bilateral agreement
with the USA in December 2002.
The second conjunctural pressure on subregionalism stems from the hemi-
spheric integration project. If existing subregional arrangements are based on the
extension of trade preferences to member countries, the construction of an FTAA
will necessarily and logically remove the rationale for the smaller trade blocs it
encompasses. The upshot, according to this argument, is that the loss of their
economic rationale will generate a process by which the structures of preferences
and tariffs that define these blocs are gradually or suddenly erased by the
provisions of hemispheric free trade. Such is certainly the vision that the USA
brings to the negotiating table: especially for business and members of Congress,
subregional blocs are perceived to be simply the forerunners and facilitators of
the levelling of the hemispheric playing field implied by the FTAA. This vision
of hemispheric globalisation thus brings with it the redundancy of subregional
blocs (SELA, 1999: 3637). While this latter argument should be challenged (see
Phillips, 2003), nevertheless an FTAA does necessarily augur a reconfiguration of
the nature of subregionalism in order to accommodate the rules agreed at the
hemispheric level, and consequently the function of blocs such as the Mercosur
becomes open to considerable question. In a situation in which the Mercosur is
already beset by myriad internal tensions, including preferences for bilateralism
and an ambivalent leadership, the threat to subregionalism from an FTAA has been
seen by many to augur its demise. As Paul Cammack (2001) argues, for instance:
Mercosur is an ineffective regional association with little remaining capacity to
contribute to regional or global integration, and little capacity to promote other
goals. It is likely to be marginalised by profound differences of perspective between
its major partners, and overtaken by broader processes such as the move towards a
Free Trade Area of the Americas.
I suggest, however, that such a vision issues from a particular way of thinking
about regionalism, and specifically from a focus on the formal, regionalist
processes associated with the regional governance project. It would seem that
much of the problem emerges from the tendency to view regions as simply
nations writ large,
4
in the sense that regionalism is portrayed simply as the
magnification of domestic economic activity or sets of policy priorities. In other
words, such a perspective assumes that the regional arena is a modus operandi for
domestic modes of capitalist organisation. The nation writ large understanding
of regionalism might identify ways in which domestic policy strategies can be
influenced by the existence of a regional bloc, but allows limited room for the
notion that strategies might be informed, shaped and determined by the processes
associated with the regional project. For this we need an understanding of
processes of regionalisation, parallel to our analysis of formal regionalist
processes. In the context of the Southern Cone, these processes of regionalisation
are significantly stronger than the processes of state-led regionalism, but more-
223
NICOLA PHILLIPS
over serve to buttress the regionalist governance project in ways which cast doubt
on its envisaged obsolescence.
The contours of market-led regionalisation
Regionalisation, like globalisation, is not a state-led project but rather represents
combinations of historical and emergent structuresa complex articulation of
established institutions and rules and distinctive new patterns of social interaction
between non-state actors (Gamble & Payne, 1996: 250). The relevant processes
of regionalisation are thus manifold, and cannot all be covered in a single article.
5
Our concern here, in the first instance, is with processes of market-led regional-
isation, which are grounded specifically in the gradual regionalisation of the
strategies and structures of firms. This re-organisation of capital has propelled the
construction of a genuinely regional market, which crystallises around the
Mercosur, though does not correspond exactly with the borders of its member-
ship. It rests, on the one hand, on the transnationalisation strategies of domestic
firms, and on the other on the strategies of foreign investors and corporations
aiming to erase the limitations to their activity posed by national boundaries
within the Mercosur.
Corporate strategies linked to the Mercosur divide into two groups, the first
relating to purely commercial strategies, found particularly in capital goods
sectors, the second to more direct productive strategies. The latter strategies have
been most characteristic of transnational corporations (TNCs) with operations in
Argentina and Brazil, while complementation between local firms in these two
countries has been concentrated in production activities linked with consumer
and intermediate goods (Lpez & Porta, 1995: 255256). In many respects it
is the market strategies of TNCs that have been most pivotal in carving out
regionally defined modes of business organisation in the wider Mercosur arena,
and in turn the investment strategies of these corporations have largely been
shaped by the existence of a subregional bloc. While foreign investment in
Mexico, Central America and the Caribbean over the 1990s was directed
predominantly at generating international competitiveness (particularly in firms
and sectors exporting to the USA), across the Southern Cone the target of capital
inflows was consistently local and subregional markets were constructedand
comparatively protectedby regional integration projects (ECLAC, 2001: 55). In
other words the focus of transnational capital in the Southern Cone has been the
possibilities afforded by investment in local markets to make inroads into the
Mercosur itself, along with the advantages proffered by the subregional economy
of scale. In some cases, in addition, TNCs have sought to take advantage of the
special provisions afforded to certain sectorsmost notably the automotive
sectorin the Treaty of Asuncin which founded the Mercosur in 1991.
The strategies of foreign-owned TNCs, as a result, have moved consistently
away from a national focus to a regional one. Recent survey data gathered by
Oliveira Holzhacker and Guilhon Albuquerque (2002) suggest, for instance, that
about 85% of EU TNCs (and 63% of the largest Brazilian firms) have elaborated
strategies aimed at the Mercosur market. The clearest dimension of this shift is
reflected in the rationalisation of operations in the Southern Cone, in terms both
224
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
of activity and of management structures. The aim and result of rationalisation
has been that the subsidiaries of TNCs in various parts of the region have become
significantly more specialised, and production activities progressively defined in
regional rather than national terms. Examples include firms such as Nestl,
Unilever, General Motors, Coca Cola, and Procter and Gamble (ECLAC, 2001:
96). Similar processes are visible in the restructuring of the pharmaceuticals
industry, for instance, and especially in the automobile sector. Along with such
rationalisation strategies, investment strategies over the 1990s also became more
conditioned by the notion of regional expansion, and in national markets thus
became styled as stepping stones to the rest of the Southern Cone, or indeed
Latin America. The example of services markets in Chile stands out in this regard
(ECLAC, 2001: 100). Conversely, the appeal of a Mercosur market has bolstered
the appeal to TNCs of maintaining a presence in various national economies. This
is most especially the case for Argentina, in particular in the automobile, capital
goods and household appliances sectors (Lpez & Porta, 1995: 258).
Likewise, the transnationalisation strategies of Southern Cone firms have been
focused to a preponderant extent on the regional marketplace and have only
exceptionally been genuinely global in character. These regionalisation
strategies are particularly pronounced in Argentina, where Mercosur countries
(including Chile and Bolivia) constitute the primary destination for firms foreign
direct investment strategies. Take the example of the firm SOCMA.
6
While its
activities are still concentrated in Argentina, its presence in Brazil (probably the
strongest of Argentine firms) has steadily and significantly increased since about
1994, and its organisational and management structures are gradually being
reconfigured to take account of this bi-national profile.
7
Its operations in
Uruguay have similarly gained in prominence in a number of sectors,
8
but
crucially the automotive sector has been dominant in both SOCMAs own regional
expansion and in the broader processes of corporate regionalisation that have
crystallised in the Mercosur arena since the mid-1990s. The importance of other
Latin American markets should not be overlooked, but here there is a clear
distinction between Argentine firms commercial strategies, on the one hand,
and, on the other, investment strategies involving the physical establishment of
industrial operations. Destinations for the former are more regionally diversified
than for the latter, for which Southern Cone economies are overwhelmingly
preponderant. Companies such as Bag, IMPSAT and the oil company YPF have
industrial operations in North America (mainly in Mexico) and the latter two
indeed might qualify as operational on a global stage, but an altogether
much greater number (including Arcor, IMPSA, Prez Companc, Sancor, and
SOCMA) have an almost exclusively South American profile in terms of physical
operations, in which Mercosur countries again are overwhelmingly preponderant
(see Chudnovsky et al, 1999: 123124).
While in Argentina the focus has fallen emphatically on Mercosur markets, the
profile of Chilean firms strategies has been one dominated rather more by
the wider Latin American market, although within this rather more diversified
structure Southern Cone economies still stand out. The Latin American market
has been especially pivotal in the turn towards non-natural resource-based
exports, encompassing both manufactured products and non-financial services
225
NICOLA PHILLIPS
(Chudnovsky et al, 1999: 266), and the Mercosur market has been particularly
important given the lack of competitiveness of such export products in both
wider regional and global arenas. With regard to Chilean investment, moreover,
Southern Cone economies overshadow destinations in both Latin America and in
the rest of the world. Argentina constitutes the most important destination,
accounting in 1997 for some 43.6% of total Chilean investment, followed by
Peru and then Brazil, the latter accounting for 10.8% in the same year
(Chudnovsky et al, 1999: 281).
Such strategies have been less common in Brazil, where TNCs remain more
dominant and the majority of domestic firms have been absorbed by transnational
interests (Chudnovsky et al, 1999: 9). It is notable that the activities of a good
number of these TNCs in Brazil are orientated towards the domestic market rather
than towards external trade. One side-effect of this comparatively low level of
internationalisation is that the onslaught of competitive pressure for Argentine,
Uruguayan and Paraguayan firms was considerably greater than for Brazilian
firms (as demonstrated by Oliveira Holzhacker and Guilhon Albuquerques
(2002) data), given both the relatively protected nature of the Brazilian market
and the fact that Brazilian industrial products were already competitive in the
Southern Cone arena. As we have seen, it is also the case that the attraction to
Brazil of Mercosur economies as trading partners is significantly less than vice
versa. Nevertheless, leaving aside questions of volume, over the course of the
1990s the Mercosur market was the most dynamic destination for Brazilian
exports, growing at an annual average of 26.9% against an annual average
growth rate of only 6.3% for total exports. Exports to Mercosur countries were
also concentrated in manufactured products, which accounted for about 70%
of total exports to Mercosur countries in 1998. Southern Cone economies are also
important as sources of imports, among which Argentine agricultural products
stand out, along with cars, footwear and food products (see da Motta Veiga,
1999: 315, 325). Brazilian foreign investment in services is concentrated over-
whelmingly in Mercosur markets, and furthermore Brazilian investment in
Mercosur economies is dominated by investment in services sectors, accounting
for two-thirds of total Brazilian investment in Uruguay and almost 100% of the
total directed from Brazil to Paraguay. Argentina is the preponderant destination
for Brazilian investment in financial services (Page, 2001: 56). Crucially, taking
us back to earlier points in this section, this expansion of both commercial and
investment engagement with the Mercosur arena has been notable for the growth
of the participation in it of TNCs, which increased by an annual average of 56%
over the 199097 period (da Motta Veiga, 1999: 329).
For their part, the attitude to the Mercosur of small and medium sized enter-
prises (PYMEs, in Spanish) across the region has been, inevitably, mixed. On the
one hand, the threat from imported goods has produced caution and, in some
cases, hostility to the liberalisation of regional trade and the construction of a
regional market place. This has been particularly the case where mechanisms of
compensation or active state promotion strategies are lacking, or alternatively in
situations in which the liberalisation of regional trade entails the likely or actual
retraction of state promotion mechanisms. Antipathy to the Mercosur over
the 1990s was also found predominantly in those national firms that were not
226
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
regionally competitive in their particular sector, and this wariness found special
expression, not surprisingly, in those firms and sectors faced with significant
competition from their Brazilian counterparts. For manyperhaps mostPYMEs,
the extraction of meaningful value from the Mercosur was thus at best difficult.
On the other hand, many PYMEs over the 1990s saw the Mercosur as proffering
important opportunities for the expansion of their commercial activity and,
consequently, their competitiveness. Given that participation in the wider global
economy was not a feasible option for the vast majority of PYMEs, the Mercosur
was thus both a logical strategic focus and a springboard for the future develop-
ment of more active internationalisation strategies. Francisco Gattos (1995)
surveys of Argentine PYMEs in the mid-1990s, for example, revealed that over
half were committed to precisely such an expansion of their exchange with
Mercosur countries, above all with Brazil, although proactive strategies of this
sort remained in rather short supply. He also detected, moreover, a generalised
perception of the potential benefits to be derived from co-operation between
PYMEs in the region, particularly in the interests of enhancing productive special-
isation. Such perceptions notwithstanding, it should be emphasised that corporate
strategies aiming at the Mercosur market remain predominantly the preserve
of larger regional and transnational firms. Similarly, the process of market
integration, while still in its early stages, remains driven by big business, often to
the exclusion of smaller firms.
We should take care not to exaggerate the extent of inter-firm co-operation,
whether we are talking about PYMEs, domestic firms or TNCs. Certainly the sorts
of regional production networks that had emerged by the end of the 1990s in the
NAFTA were not mirrored in corporate development in the Mercosur (UNCTAD,
cited in Klein, 2000: 141). The point, nevertheless, is two-fold. First, the
attraction of FDI is vital for the emerging internationalisation strategies of local
firms, and the regional market constitutes a central incentive to inflows of FDI.
Second, evidence suggests that the Mercosur arena is utilised increasingly as a
stepping stone to more global production strategies, and styled as an incubator
of industrial competitiveness for this purpose. With the launching of the FTAA
project, this notion of the comparatively protected regional market as an
incubator has become particularly important. This is so primarily because of the
lack of competitiveness of the bulk of Southern Cone products in both global and
wider hemispheric marketplaces. Particularly in an FTAA in which minimal
liberalisation is envisaged in agricultural trade or other key sectors, the lack of
industrial competitiveness brings with it considerable adjustment costs for almost
all economies. In Brazil the emerging form of hemispheric free trade is seen by
some (particularly smaller and domestic-orientated) business sectors and the state
to represent a sizeable threat. In Argentina as well, the emphasis has fallen on the
costs of adjustment implied by hemispheric free trade for domestic and sub-
regional economic interests. A survey by the Unin Industrial Argentina
(Argentine Industrial Union, UIA) in 1998, for instance, suggested that 70% of
Argentine firms did not feel prepared for an FTAA, and one assumes that the
impact of the current crisis will have increased that proportion. It goes without
saying that the subregional market remains crucial for the smaller economies.
Towards the end of the 1990s the emphasis thus fell on the subregional arena
227
NICOLA PHILLIPS
(protected putatively by a common external tariff) as a site for the adjustment
necessitated by a wider regionalist project.
States and the reconfiguration of the regionalist project
The result of these processes of market-led regionalisationin conjunction with
the various other social processes of regionalisation at workhas been not only
the emergence of a new form of regional political economy in the Southern Cone,
but also the reconfiguration of the regionalist governance project. Its significance
thus lies, both empirically and conceptually, in the relationship it signifies
between the regionalist project and broader regionalising processes: in other
words, between the increasingly beleaguered and ponderous formal intergovern-
mental dimensions of the Mercosur, on the one hand, and on the processes
of market regionalisation, on the other. Rather than advancing alongside the
regionalist project, these regionalising trends have developed a marked inde-
pendent momentum. The construction of a region, in this sense, is proceeding
on a number of fronts, of which the formal intergovernmental front became
perhaps the least robust over the course of the 1990s. It is in good part for this
reason that the Mercosur project retains its rationale and utility, despite the
profuse political obstacles to its further consolidation, and indeed despite
the challenges issuing from an eventual FTAA. Crucially also, the regionalist
dimensions of the regional governance project are increasingly orientated to
underpinning these processes of market-led regionalisation, as a result of which
they feature an important shift away from a dominant preoccupation with open
regionalism as a strategy of trade liberalisation, towards a set of regionalist
strategies more attuned to the attraction of investment flows, and to industrial
strategies to fostering the competitiveness of indigenous firms. Recent efforts to
so redefine the Mercosursuch as its relaunching of 2000 and the flurry of talks
in the early months of the Argentine crisiscan thus be seen as pointing towards
the consolidation of an environment conducive to the entrenchment of the rules
that undergird this form of regional governance structure.
The reconfiguration of the regionalist project, however, has at its root a
reorganisation of the dominant form of state, which of course drives regionalist
processes. In this regard, our above argument has a good deal in common with
recent currents in the broad study of states and state strategies, in which the
regulatory state model has become one of the most favoured frameworks. This
model has been applied most frequently to European states (McGowan &
Wallace, 1996; Wilks, 1996; Burnham, 1999), but increasingly to a number of
Asian states (Jayasuriya, 2001) and further to the Chilean case (Muoz Goma,
1996). In its broadest sense it refers to a process by which economic management
becomes depoliticised or else proceduralised: it is characterised by an increas-
ingly rules-based and technocratic approach to economic governance, in which
there is a greater emphasis on the operational independence of key institutions
such as Central Banks. The functions of such a state are seen to be two-fold: first,
to underpin markets and, second, to address market failures through the provision
of various rights and goods (McGowan & Wallace, 1996: 562). As such,
the notion of the regulatory state has been developed in order to understand a
228
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
situation characterised not by complete deregulation but rather also by key areas
of re-regulation, particularly of financial markets (Gamble, 2000: 114; Burnham,
1999: 46). The regulatory state in this sense is fundamentally an enablingrather
than a planning or interventionistone.
At first glance the regulatory state label seems rather problematic as a
descriptor of the changing nature of states in the Southern Cone region. The
implementation of neoliberal strategies both preceded and outstripped the
development of regulatory regimes and capacities, reflecting enduring and
pervasive institutional weakness. Privatisation took place without the previous
preparation of the state to assume the role of regulator of competition and, except
in Chile, central banks have not been accorded significant independence. The
institutional realignments and operational independence associated with the
depoliticisation of policy management and moves towards regulatory governance
elsewhere thus find minimal expression in the Southern Cone. Nevertheless, the
model is useful in identifying a particular mode of economic governance,
notwithstanding the lag in the emergence of the appropriate state structures at the
domestic level. Emerging elements of a depoliticised or regulatory style of
economic management are especially visible in the elements of the model which
emphasise external mechanisms of policy validation and the acceptance of
binding rules for limiting government room for manoeuvre (see Burnham, 1999:
49). In the Southern Cone cases, such mechanisms most obviously include
agreements with multilateral and financial institutions. While they are important
to establishing credibility as well as necessary financing, however, it should be
noted that these mechanisms of external validation remain perceived more as
signs of weakness than as signs of economic health or as manifestations of an
overall depoliticisation of economic governance, and that their record of effec-
tiveness has been a rather unhappy one. Mechanisms of external validation which
have found rather firmer ground relate to the implantation of a rules-based
policy-making environment. So-called codes of fiscal responsibility were agreed
in Argentina and Brazil in the late 1990s; the regulatory characteristics of the
Chilean state, which in any case approximates the model most closely, rest
similarly on the principle of fiscal responsibility, along with a structure of
financial regulation. Apart from being politically charged, especially in times of
crisis, the implementation of such laws of fiscal responsibility is complicated by
the aforementioned levels of institutional weakness, but nevertheless the drift at
the domestic level has been towards the elaboration of such mechanisms, which
aim to lay the foundations of a rules-based mode of economic governance.
Moreover, a central avenue by which such institutional and political obstacles
are progressively addressed relates to strategies of regional co-ordination. On
the one hand, such strategies are designed to reinforce rules-based economic
governance by removing discretionary policy-making authority from individual
national governments, and to compensate the institutional weaknesses at the
domestic level which hamper the development of states regulatory capacities.
Of course, regional-level co-ordination is in itself a mechanism of external
validation, and is a key feature of regulatory styles of economic management.
On the other hand, the process of market regionalisation of the sort we have
describedresting heavily on the appeal of a regional economy of scale to TNCs
229
NICOLA PHILLIPS
and transnationalising domestic firmsrequires both the maintenance of the
rules governing such an arrangement between constituent countries, and the
further harmonisation of domestic policies in order to increase the stability and
attractiveness of this marketplace for private sector activity. The bulk of relevant
regional initiatives in the late 1990s and early 2000s were tied up with the
nascent progress of policy harmonisation, a first step towards which was
statistical harmonisation in order to increase the accountability and transparency
integral to regulatory styles of economic governance, and then progress towards
the negotiation and agreement of common fiscal targets among Mercosur
member countries. The issues of taxation and other economic policies that are
necessary accompaniments to fiscal reform are also part and parcel of the
emerging process of macroeconomic convergence. Most importantly, the negotia-
tion of common investment rules and competition policy has been identified as
central to the process of deepening and redefining integration in the Mercosur,
and these are pivotal in constituting the emerging regional governance structure.
Early movements in the area of competition policy turned out to be largely
illusorythe 1996 Protocol for the Defence of Competition is still awaiting
congressional approval to make it legally enforceablebut there has been a
handful of subsequent initiatives which indicate some (slow) progress towards
the agreement of some regional norms. Examples include the establishment in
2000 of a working group on investment incentives, and Argentinas 1999
Defence of Competition Law, which aligned Argentine competition policy more
closely with Brazils and is likely to facilitate the advance of harmonisation
(Chudnovsky & Lpez 2003: 151). The consequence is that a movement towards
a rules-based style of economic governance is reinforced by the imperative of
maintaining for investors the coherence of the regional market and transparency
in the policy rules which govern it.
The key point in all of this, however, relates not only to the ways in which
regional co-ordination facilitates the elaboration of various state strategies, or
to the ways in which the reorganisation of the state propels and underpins the
reconfiguration of the regionalist project, but also to the ways in which the shape
of domestic political economy is moulded by processes of regionalisation. As
suggested earlier, this dimension of the relationship between domestic and
regional processes is neglected as a consequence of the nation writ large frame-
work which pervades much of the study of regionalism. In other words, alongside
our understanding of the ways in which regionalist projects emerge from and
reinforce domestic processes, we need an understanding of the impact of
regionalising forces on the shape of domestic political economies and processes
of change within them. Our attention here to the reorganisation of the dominant
form of state in the Southern Cone, propelled by processes of market-led
regionalisation and manifested in the form of the regionalist project, thus
suggests the need to dispense with the nation writ large assumption and to seek,
instead, to understand a much more complex relationship between regional and
domestic political economy. It also underlines our earlier argument that a focus
merely on formal regionalist processes is inadequate for understanding either the
regional governance project underpinning the Mercosur, or indeed its viability.
230
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
Conclusions
As in Asia, the original project of open regionalism in the Southern Cone
appears effectively to have petered out. This is not, like in Asia, the immediate
consequence of financial crisis: rather, it reflects a more protracted process of
internal fragmentation which has stunted the evolution of the regionalist project
beyond its early successes in the area of trade liberalisation, and which issues
predominantly from the entrenched divergence of domestic political economy
structuresand consequently what we have called visions of regionalism
among member countries. Although for different reasons, then, regionalism in
both Asia and the Southern Cone is in a state of flux, and I have argued that a
new regional governance project is crystallising in the latter which represents
quite a significant departure from the regionalism of the early 1990s. Pulling
together the strands of the above arguments, I suggest that the new regional
governance project in the Southern Cone has three essential characteristics:
The constitution of the region primarily through market-led and other
regionalisation processes, which lend rationale and impetus to the main-
tenance of the regionalist project of the Mercosur.
The reorganisation of the regionalist project to privilege investment attraction
and industrial competitiveness, and to construct a rules-based governance
foundation for the emerging regional marketplace.
The dominance of strategic and political objectives in visions of the Mercosur
project, focused on external negotiations, and reflected particularly in the
articulation of Brazils subregional leadership role.
This reorganisation of the regionalist project has taken place against the backdrop
of an increasingly complex wider regional context, of which the negotiations for
an eventual FTAA are the most salient dimension. The hemispheric project augurs
a more messy and overlapping pattern of regionalist arrangements (which in
many ways resembles patterns in the Asian region), and not, as the hemispheric
globalisation rhetoric suggests, an absorption of the existing patchwork of
regionalist projects into a single FTAA. Accommodation between these contending
projects is consequently the primary challenge for regionalism, and indeed the
contours of the Southern Cone project that have been sketched here reflect this
context. There is a sense in which an FTAA represents an alternative regionalist
project which will compensate for the numerous deficiencies of the Mercosur.
Certainly a good number of the most obvious sticking points, such as services
and investments, will be negotiated at the hemispheric level. This might well be
used as part of an argument that the Mercosur will lose validity as much of the
policy framework becomes standardised outside its borders. However, it is
important to recognise that the Mercosur and FTAA processes are separate from
one another, and are treated as such within the Mercosur. The central aims are
similarnamely to eliminate export subsidies and to restrict the use of measures
such as anti-dumping in trade relationshipsbut it is precisely these issues that
might best be treated in the Mercosur, especially given the reluctance of the USA
to open them for negotiation at the hemispheric level or in the WTO. Furthermore,
231
NICOLA PHILLIPS
there is no necessary correspondence between internal Mercosur policy and
negotiating positions in the FTAA, and the activities of the national working
groups and institutions that are involved in the FTAA negotiations are aimed
exclusively in this direction. Consequently, in areas such as industrial policy,
treatment of smaller and poorer economies, anti-dumping and restrictive trade
practices, perhaps social policy, and perhaps even dispute resolution, the
Mercosur presents an arena in which regionally appropriate policies (or those
which fill the gaps left at the hemispheric level) might be designed. The contours
of the new regional governance project, in this sense, are both compatible with,
and shaped by, its emerging relationship with the wider regionalist process in the
Americas.
In conceptual terms, I have argued that an understanding of contemporary
regional governance in the Southern Cone, and indeed elsewhere, requires a
much closer attention to processes of regionalisation and their relationship with
the formal regionalist project. Regionalisation cannot be understood in the
absence of a conception of regionalism: on the one hand, the latter seeks to
accelerate, modify, or perhaps reverse these processes of social change and, on
the other, it is pivotal in the continual reproduction of these structures (Gamble &
Payne, 1996: 250). What regionalism means, in essence, is that strategies of
national economic management and the processes by which accumulation occurs
(as well as the type of accumulation that is privileged) can be expected to
undergo a redefinition. This redefinition involves a reconfiguration of social
relations occurring over a regional, rather than a domestic, terrain and the
emergence of common forms of market organisation and economic strategy.
However, regionalisation also needs to be conceptualised as constitutive of
regionalism, and indeed the case of the Southern Cone suggests that, increas-
ingly, it is the emerging dynamics and architecture of regionalisation that have
lent rationale to the ailing regionalist project and have shaped the domestic and
international strategies it represents. While the dynamism of regionalisation thus
clearly depends on the articulation of a viable regionalist project which underpins
the associated processes, progressively, the regionalist Mercosur project derives
its meaning and impetus from these non-state and market-driven dynamics.
Notes
1
Mercado Comn del Sur, or Southern Common Market, comprising Argentina, Brazil, Paraguay and
Uruguay, with Chile and Bolivia currently as associate members.
2
I draw here on Anthony Payne and Andrew Gambles (1996: 2) definitions of regionalism and
regionalisation, the former referring to a state-led or states-led project designed to reorganise a
particular regional space along defined economic and political lines, and the latter to a social process
manifest at the regional level. Following their lead, I use the adjective regionalist specifically to
refer to regionalism, and the adjective regional to denote the much broader context of both region and
the conjunction of processes associated with regionalism and regionalisation.
3
It is interesting, in this regard, that one of the principal pillars of the Brazilian-driven push towards
closer integration in the region was the creation of a South Americanas opposed to Latin American
or indeed hemisphericidentity, which would facilitate the construction of a South American Free
Trade Area (SAFTA).
4
This phrase is borrowed from Hugo Radice (2000: 8), who uses it in the different context of the treat-
ment of regions in the globalisation literature, referring to the tendency to treat a region as a nation in
order to assert that globalisation can be condensed into a notion of regionalisation, and thereby to
question the existence of the former.
232
REGIONAL GOVERNANCE IN THE SOUTHERN CONE OF LATIN AMERICA
5
These myriad processes of regionalisation, and their constitution of a new regional political economy,
are elaborated in my forthcoming The Southern Cone Model: The Political Economy of Regional
Capitalist Development. The material in this section draws on this source.
6
Sociedad Macri. SOCMA classifies its activities principally in the fields of public services and infra-
structure, automobiles, construction, food and information technology. See http://www.socma.com.ar
for a profile of its interests, assets and activities.
7
SOCMA: taking Mercosur seriously, Argentina Monthly, August 1999, at http://www.invertir.com.
8
See interview with Francisco Macri (president of SOCMA) for the Uruguayan radio station Radio El
Espectador, 6 October 1999, at http://www.espectador.com/text/especial/macri.htm.
References
Bernier, I & Roy, M (1999) NAFTA and Mercosur: two competing models?, in: G Mace, L Blanger &
contributors (eds), The Americas in Transition: The Contours of Regionalism, pp 6991 (Boulder,
CO: Lynne Rienner).
Burnham, P (1999) The politics of economic management in the 1990s, New Political Economy, 4 (1),
pp 3754.
Cammack, P (2001) Mercosur and Latin American integration, in: K Radke & M Wiesebron (eds),
Competing for Integration: Japan, Europe and Latin America (New York: ME Sharpe).
Chudnovsky, D, Kosacoff, B & Lpez, A (1999) Las Multinacionales Latinoamericanas: Sus Estrategias
En Un Mundo Globalizado (Buenos Aires: Fondo de Cultura Econmica).
Chudnovsky, D & Lpez, A (2003) Policy competition for foreign direct investment, in: D Tussie (ed),
Trade Negotiations in Latin America: Problems and Prospects, pp 135154 (Basingstoke: Palgrave).
Da Motta Veiga, P (1999) Brasil en el Mercosur: poltica y economa en un proyecto de integracin, in: J
Campbell (ed), Mercosur: Entre la Realidad y la Utopa, pp 299373 (Buenos Aires: Grupo Editor
Latinoamericano).
de Paiva Abreu, M (2003) Latin American and Caribbean interests in the WTO, in: D Tussie (ed), Trade
Negotiations in Latin America: Problems and Prospects, pp 1931 (Basingstoke: Palgrave).
ECLAC (UN Economic Commission for Latin America and the Caribbean) (2001) Foreign Investment in
Latin America and the Caribbean, 2000 Report (New York: United Nations).
Gamble, A (2000) Economic governance, in: J Pierre (ed), Debating Governance: Authority, Steering,
and Democracy, pp 11037 (Oxford: Oxford University Press).
Gamble, A & Payne, A (1996) Conclusion: the new regionalism, in: A Gamble & A Payne (eds),
Regionalism and World Order, pp 247264 (Basingstoke: Macmillan).
Gatto, F (1995) Las exportaciones industriales de pequeas y medianas empresas, in: B Kosacoff (ed),
Hacia una nueva estrategia exportadora: La experiencia argentina, el marco regional y las reglas
multilaterales, pp 133173 (Buenos Aires: Universidad Nacional de Quilmes).
INTAL (1997) Informe Mercosur No 3, 19961997 (Buenos Aires: BID-INTAL).
Jayasuriya, K (2001) Globalisation and the changing architecture of the state: regulatory state and the
politics of negative coordination, Journal of European Public Policy, 8 (1), pp 101123.
Kingstone, P (1999) Constitutional reform and macroeconomic stability: implications for democratic
consolidation in Brazil, in: P Oxhorn & PK Starr (eds), Markets and Democracy in Latin America:
Conflict or Convergence?, pp 133160 (Boulder, CO: Lynne Rienner).
Klein, W (2000) El Mercosur: Empresarios y sindicatos frente a los desafos del proceso de integracin
(Caracas: Editorial Nueva Sociedad).
Lpez, A & Porta, F (1995) Nuevas modalidades de insercin internacional: el Mercosur, in: B Kosacoff
(ed), Hacia Una Nueva Estrategia Exportadora: La Experiencia Argentina, El Marco Regional Y Las
Reglas Multilaterales, pp 231277 (Buenos Aires: Universidad Nacional de Quilmes).
McGowan, F & Wallace, H (1996) Towards a European regulatory state, Journal of European Public
Policy, 3 (4), pp 560576.
Muoz Gom, O (1996) Hacia el estado regulador, in: O Muoz Gom (ed), Despus de las
Privatizaciones: Hacia el Estado Regulador, pp 1947 (Santiago: CIEPLAN/Dolmen Ediciones).
Oliveira Holzhacker, D & Guilhon Albuquerque, JA (2002) Attitudes and strategies of multinational
enterprises about regional integration in Brazil, mimeo (Research Centre for International Relations,
University of So Paolo), March.
Page, S (2001) Regional integration and the investment effect, in: V Bulmer-Thomas (ed), Regional
Integration in Latin America and the Caribbean: The Political Economy of Open Regionalism,
pp 4564 (London: Institute of Latin American Studies).
Payne, A & Gamble, A (1996) Introduction: the political economy of regionalism and world order, in:
A Gamble & A Payne (eds), Regionalism and World Order, pp 120 (Basingstoke: Macmillan).
Phillips, N (2003) Reconfiguring subregionalism: the political economy of hemispheric integration in the
Americas, International Affairs, 79 (2), pp 257279.
233
NICOLA PHILLIPS
Phillips, N (2001) Regionalist governance in the new political economy of development: relaunching
the Mercosur, Third World Quarterly, 22 (3), pp 565583.
Phillips, N (2000) Governance after financial crisis: South American perspectives on the reformulation of
regionalism, New Political Economy, 5 (3), pp 383398.
Radice, H (2000) Responses to globalisation: a critique of progressive nationalism, New Political
Economy, 5 (1), pp 519.
SELA (Sistema Econmico Latinoamericano) (1999) Reflexiones sobre la dinmica de las relaciones
externas de Amrica Latina y el Caribe, Captulos del SELA, 55, pp 757.
Wilks, S (1996) Regulatory compliance and capitalist diversity in Europe, Journal of European Public
Policy, 3 (4), pp 536359.
234
Asias post-crisis regionalism: bringing
the state back in, keeping the (United)
States out
Paul Bowles
1
University of Northern British Columbia
ABSTRACT
The Asian nancial crisis has signicantly changed the way in which region-
alism in East Asia is taking place. Prior to the crisis, regionalism in the area
was noted for its relative lack of formal institutions; many analyses stressed
the role of private businesses in fostering a regional economy. Post-crisis
regionalism is being led by the state and encompasses both monetary and
trade dimensions. The reasons for this change are analysed and the regional
policies of China and Japan examined. The spur to post-crisis regionalism
is argued to have been provided by a desire to limit the inuence in the
region of the US and the international nancial institutions.
KEYWORDS
Regionalism; Asian nancial crisis; China; Japan.
1 INTRODUCTION
The 1997 nancial crisis has proved to be a turning point for regionalism
in Asia.
2
As Higgott (1998: 333) astutely observed soon after the crisis,
the political manifestations of these events [the nancial crises] will linger
long after the necessary reforms have been introduced to return at least
a semblance of economic normalcy to the region. One signicant politi-
cal manifestation has been the emergence of a new form of regionalism
in Asia as indicated by the emergence of regional monetary cooperation
and by proposed sub-regional trade agreements, developments which
signal sharp changes in direction for the region. Chameleon-like in its
qualities throughout the past century, regionalism has been transformed
once more; it has again demonstrated itself to be a exible policy tool
which can used to meet a variety of objectives, economic and political.
3
It is the argument of this paper that regionalism in Asia after the nan-
cial crisis departs signicantly from its pre-crisis incarnation. Specically,
an understanding of the post-crisis regionalism requires a state-centric
Review of International Political Economy 9:2 Summer 2002: 244270
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
3411
35
36
37
38
39
40
41
42
43
44
Folio
Review of International Political Economy
ISSN 0969-2290 print/ISSN 1466-4526 online 2002 Taylor & Francis Ltd
http://www.tandf.co.uk
DOI: 10.1080/0969229011012610 0
approach and an analysis of power relations in the global economy. The
assumptions that regionalism in Asia should be analysed primarily in
terms in private actors or that it is based on a benign interdependence
between countries that span the Pacic, assumptions which underlay
much visioning of the Pacic Rim in the 1990s, are untenable. The
contours of post-nancial crisis regionalism are, by state design, aimed
at restoring to Asia a greater degree of political power and autonomy
vis--vis the rest of the world, and the US and the international nan-
cial institutions it controls, in particular. The implications of this are
profound, not only for our understanding of the region, but also for
our analysis of the current phase of the global economy.
4
In the next section, a brief description is given of the characteristics
and analysis of regionalism in pre-nancial crisis Asia. Section 3 analyses
in more detail the emergence of a new post-crisis regionalism and exam-
ines the reasons for its emergence. Particular attention is paid to the
motives of the two most signicant powers in East Asia, China and
Japan. The implications of this regionalism for theoretical analysis of the
global economy are discussed in the concluding section.
2 ASIAN REGIONALISM PRIOR TO THE
FINANCIAL CRI SIS
Embroiled in the military conicts of the Cold War period, the coun-
tries of Asia did not participate in the wave of regionalism which proved
popular with other developing countries in the 1950s and 1960s. When
regionalism re-emerged as a preferred economic policy in the 1980s and
1990s, Asia again lagged behind the rest of the world in terms of the
formal political institutionalization of regionalism. Indeed, a distin-
guishing feature of Asian regionalism for many scholars was precisely
the fact that the region itself was ill-dened (or capable of multiple
denitions) and that the regionalism that was taking place was the
result of market-led, rather than government-led, integration processes.
As Stubbs (1995: 786), for example, has argued:
although the state has been instrumental in nurturing business
growth, regionalization in the Asia-Pacic region unlike the other
major regions of the world has been driven by the private sector
not by governments. Hence, the boundaries of the region do not
coincide neatly with state boundaries. In many ways the regions
governments are still trying to come to grips with the rapid
economic changes that swirl around them.
The regional economy in Asia, and in a number of sub-regions, was
therefore identied by economists and policy analysts based primarily
on the activities of Japanese multinational corporations (MNCs) and of
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 245
overseas Chinese businesses. These activities were highlighted as oper-
ating on the basis of a series of networks based on the production
prerequisites of post-Fordism and the personal connections which facil-
itated and characterized much of the overseas Chinese diaspora. It was
these business networks, rather than the existence of supra-national polit-
ical institutions, which led to the identication and integration of a
regional economy.
5
This was also true at the sub-regional level. For
example, Greater China was identied as one such sub-region, com-
prising of an international division of labour which integrated produc-
tion in the southeastern coastal regions of China and companies in
Taiwan and Hong Kong. Here, too, the impetus for economic integra-
tion was identied as largely business driven rather than state driven.
As Naughton (1997: v) writes, rms, especially small and medium-size
family rms, play central roles in the story, with government policies
playing secondary, reactive roles.
These analyses tended to overstate the role of the market in fostering
integration in the region. They present us with something of a paradox
in that most of them accept that national economies can be described as
developmental states where governments play key roles in guiding the
market but where, it seems, inter-national and intra-regional integra-
tion are played out beyond the reach of the state. Such a paradox is, in
fact, a false one and is solved by a better appreciation of the role that
the state played in fostering intra-regional trade and capital ows. For
example, Japans policy with regard to foreign direct investment (FDI)
changed critically during the post-war decades to one favourable to, and
supportive of, FDI during the 1980s. The emergence of a hierarchical
division of labour in the region fostered by Japanese MNCs was not a
chance occurrence but one premised in no small part on Japanese policy.
6
Similarly, the ability of Japanese (and other) MNCs to expand in this
way was due in no small measure to the investment liberalization under-
taken by host governments. The emergence of the China Circle was
not entirely an accident either in which states were only reactive; in
particular, Chinas initial choice of venue for its four Special Economic
Zones (SEZs) in 1984 was based on exploiting cultural, ethnic and
geographic links between the SEZs and the overseas Chinese commu-
nities in Taiwan and Hong Kong. The subsequent rapid growth of the
four cities initially chosen as SEZs and the extent of the spread of invest-
ment into other parts of Guangdong and Fujian Provinces could perhaps
not have been predicted by Chinese policy makers, but the emergence
of a Greater China economic zone certainly owes something to their
policies.
However, while the above analyses may underestimate the role of
the state in promoting regional economic integration, they do make the
valid point that Asian regionalism was based on a lower level of formal
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 246
inter-governmental regional institutions and policies than were observed
in other regions, most notably, in Europe and North America. In this
comparative sense, the above analyses are right to stress the relatively
greater role of the market and relatively less importance of the state
in regional integration in Asia than elsewhere, even if there has been a
tendency to push the argument too far in that direction.
At the level of formal regional economic arrangements, it is true, Asia
lagged behind. While Europe was moving full speed ahead with the
Single Market project and the US was abandoning its traditional sole
reliance on multilateralism as a route to free trade and signed free trade
agreements rst with Canada and then with Canada and Mexico, Asia
remained reluctant to join in. The initial response to the emergence of
North American and European blocs included calls, made particularly
loudly by Malaysias Prime Minister Mahathir, for an East Asian Econ-
omic Group. This idea was, however, stillborn and Asian countries settled
for the different version of regionalism embodied in APEC.
7
This body
is much looser in regulatory design that the other blocs, operates by
consensus and voluntary action (or inaction) rather than by legal stric-
ture. APECs formation in 1989 owed as much to the perceived political
need to ensure that trade across the Pacic remained open and to prevent
the emergence of three closed blocs as to any substantive trade liberal-
ization initiatives. As the fear of the emergence of three protectionist
blocs receded, APEC formed, in 1993, an Eminent Persons Group under
the Chairship of Fred Bergsten to devise a Vision for APEC which
would justify its continued existence. APEC committed itself to open
regionalism and to the goal of establishing a free trade area in region
by 2010 for developed country members and 2020 for developing country
members, a goal which was subsequently adopted at the APEC meeting
held in Bogor, Indonesia in 1994. This vision represented a victory for
the pro-globalist thinkers and established for the institution a framework
which stressed the interdependence of economies, the mutual advan-
tages which existed for all in trade liberalization, and which minimized
the differences between developed and developing country members.
8
In establishing this framework, APEC was simply following, and con-
tributing to, the ways in which the ideological construction of the Pacic
Rim was being pursued in the wider intellectual and policy commu-
nity.
9
The boundaries of the region, at this level, were ever- expanding.
10
The idea of open regionalism of using regionalism to further inte-
gration into the global economy was also central to Asias most
deliberate attempt at formal economic regionalism, the ASEAN Free
Trade Area (AFTA).
11
The formation of AFTA, proposed in 1991 and
coming into effect on 1 January 1993, marked ASEANs most ambitious
attempt at regional economic cooperation since its formation in 1967 and,
indeed, put ASEAN on a path which it had rejected several times in the
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 247
past. The formation of AFTA came after many of the ASEAN countries
had struggled with the need to boost export earnings during the 1980s
in response to the debt crises of the early years of that decade. The res-
ponse of the ASEAN-4 (Indonesia, Thailand, the Philippines, Malaysia),
following the advice of the international nancial institutions, was to
engage in trade liberalization, albeit at their own pace rather than collec-
tively, and to shift towards policies more conducive to export promotion.
In addition, individual countries adopted policies more favourable to
FDI in an effort to attract the foreign capital needed to spur continued
industrialization.
These policies were fortuitous in that Japanese rms were expanding
rapidly overseas in response to the massive appreciation of the yen which
followed the Plaza Accord in 1985. Japans FDI grew at an annual average
rate of 62 percent over the 19859 period. At the same time, the East
Asian NICs were also investing heavily overseas with the ASEAN-4 and
China being favoured destinations. As a result, FDI as a percentage of
GDP quadrupled in the ASEAN-4 between 1985 and 1990. Having shifted
to a strategy of FDI-sponsored export-led growth, ASEAN states were
keenly aware of the need to ensure that ASEAN as an investment site
remained competitive. At the end of the 1980s there appeared to be a
signicant threat to this in the form of competition from China, the
former Soviet bloc following the dramatic events of 198991, the poten-
tial investment-diverting effects of greater European integration in 1992,
and the NAFTA, particularly the threat of investment diversion to
Mexico.
The increasing concern about possible investment diversion is clear
from the joint communiques of the ASEAN ministerial meetings with
the ASEAN foreign ministers responding to the increasing competing
demand for capital and investment resources from Eastern Europe, from
the indebted countries of Asia, Latin America and Africa, as well as to
meet the needs of reconstruction in the Gulf and in the Soviet Union
12
by supporting the call for an ASEAN free trade area in 1991. A regional
economic agreement was seen therefore as the best way of maintaining
ASEANs investment appeal and of fostering its continued integration
into global trade and capital ows. Thus, the formation of AFTA was
in large part a response to the changing external environment, and in
particular the fear of investment diversion.
13
The spur to create AFTA
also owed something to ASEANs desire to remain relevant in the face
of the rise of APEC and, in this sense, also had political motives. Regional
projects typically contain a political dimension, a dimension which, as
will be argued in the next section, has come fully to the fore. To summa-
rize, regionalism in Asia in the early to mid-1990s was premised on the
emergence of an economic region increasingly integrated by the activi-
ties of multinational corporations, particularly Japanese MNCs, and by
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 248
the network capitalism epitomized by the Chinese diaspora. This pro-
cess was undoubtedly a more private-sector-driven process than that in
evidence in other regions, although even in Asia state policies played
important roles in shaping the kind of regional economic integration that
took place. At the level of formal regional economic institutions, the
region was more spatially ambiguous with APEC acting as a loose
consortia of countries notionally acting to preserve open trade across the
Pacic. The most concrete form of regional economic arrangement was
provided by the AFTA, an arrangement premised on the need of ASEAN
countries to remain competitive in attracting investment in the changed
post-Cold War international political economy. The use of trade and
investment liberalization agreements to promote integration into the
international economy was supplemented with the domestic liberaliza-
tion of nancial markets with the result that nancial capital also poured
into ASEAN and other Asian countries in the 1990s. However, this was
to lay the seeds for the nancial crisis of 1997, as the money which
poured into the region equally quickly poured out, and led to a crisis
which profoundly altered the economic landscape in Asia and which
has changed the basis for regional economic cooperation.
14
3 ASI A S POST- FINANCIAL CRI SI S REGIONALISM
3.1 The Crisis and the IMF
The events of the Asian nancial crisis are well known and will be
summarized only briey here.
15
The main focus in this section will be
on the response to the crisis and the implications of this for our under-
standing of regionalism in Asia. The Asian crisis was triggered by the
decision of the Thai central bank to oat the baht on 2 July 1997. The
Thai government decided that it could no longer defend the currency,
announced a managed oat, and called upon the IMF for technical assis-
tance. The contagion spread to other countries in the region including
the Philippines, Malaysia, Indonesia, South Korea, Hong Kong, and
Vietnam. By the time the dust had settled, the IMF had instituted the
largest bailout in its history with the US$ 54 bn loan to South Korea.
Indonesia received US$ 40 bn, Thailand US$17.2 bn and the Philippines
US$1 bn.
16
While the facts of the crisis are well known, the causes of the crisis
remain disputed. For some, nancial panic provides the most plausible
explanation with the irrational behaviour of foreign investors to blame
for the sudden dramatic reversal in capital ows to the region.
17
For
others, the weakness of domestic nancial institutions, their lack of regu-
lation, and the general malaise of crony capitalism was to blame.
18
It
is clear that one of the critical actors in the drama the IMF saw the
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 249
cause of the crisis as emanating from essentially domestic factors which
required the tried and trusted methods associated with the stabilization
and structural adjustment programmes which the IMF and World Bank
had been applying to other developing countries since the early 1980s.
As MacLean et al. (1999) noted, the IMF intervened in Asia both at the
macroeconomic and structural levels. The policies recommended at
the macroeconomic level were, by and large, the typical ones that char-
acterized IMF interventions in the past. To stop currency depreciation
and restore condence, the IMF prescribed its traditional austerity med-
icine. This involved, rst of all, a tight monetary policy, i.e. an increase
in interest rates and the adoption of strict limits on the growth of the
money supply. In order to cover the carrying costs of the nancial bailout,
the IMF also asked for the curtailment of government budgets (achieved
mainly through the reduction of social programmes, the scrapping of
large public infrastructure projects and the elimination of subsidies).
These scal measures have been criticized since none of the countries in
question was particularly proigate in the spending. In fact, since 1993,
only Korea had run a budget decit equal to 0.1 per cent of GDP
and this only in 1996. Thailand and Indonesia had run average budget
surpluses of 2.3 and 1.2 per cent of GDP respectively.
Critics argued that the tightening of state budgets would inevitably
worsen the recession brought about by the crisis and it did. The recog-
nition that these policies were not bringing about the desired effects
(exchange rates continued to slide, the outow of capital worsened and
output fell more than projected), and the perception that they might
trigger social unrest, led the IMF to modify some aspects of its pro-
gramme. However, the damage caused by the nancial crisis and, in the
view of many in Asia, exacerbated by the policies of IMF had been done
as economic crisis followed the nancial crisis and brought with it
unprecedented output declines after a decade or more of rapid growth.
19
A noticeable recovery in output and the trade account has taken place
since the depth of the crisis. However, the cost has been high in terms
of the development objectives of the countries concerned and have been
achieved almost entirely through deation. For example, in the ASEAN-
4 and South Korea the change in the current account went from a
cumulative decit of US$ 54 bn in 1996 to a cumulative surplus of US$
69.2 bn in 1998, a total adjustment of US$ 123.2 bn. However, as Table
1 indicates, a full US$ 116.6 billion of this adjustment was due to a fall
in imports and only US$ 6.6 bn was due to increased exports.
As Table 1 shows, the restriction of domestic demand caused by the
nancial crisis and the IMF imposed austerity measures was sufciently
large to cause a dramatic decrease in imports and thereby lead to a turn
around in the trade balance. Thailand, for example, went from having
a current account decit equal to 8 per cent of GDP in 1996 to a surplus
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 250
of 12 per cent of GDP just two years later a staggering change brought
about almost entirely by collapsing imports. To the short-term decreases
in living standards implied by the drop in imports must be added,
therefore, the longer- term development costs of import reductions.
The policies undertaken by the IMF at the structural level were espe-
cially criticized in Asia. Policies under his heading can be divided into
two categories: (1) those designed to reform nancial systems and
(2) those aiming to open up the economies of the crisis countries. Under
the rst category, the IMF pushed for the closure of insolvent and, in
some cases, simply illiquid banks, the enforcement of capital adequacy
standards and the adoption of Western accounting practices and disclo-
sure rules. Bank closures in the midst of nancial panic, however, invited
even greater panic, while the hasty enforcement of capital adequacy stan-
dards, in conjunction with the general credit squeeze, contributed to
recession by making it impossible for many companies to obtain even
working capital.
Under the second category, the IMF encouraged the dismantling of
national monopolies, the sale of state assets to the private sector, the
elimination of tariffs and non-tariff barriers to trade, and the opening of
the nancial and insurance sectors to foreign investors. These policies
of intrusive or deep conditionality went well beyond what could be
justied by economic theory alone. For example, countries were pres-
sured into accepting greater foreign ownership even though this ran
counter to much of the literature on resale FDI. As Bhagwati (1998: 9)
noted: Economists have usually advised the exact opposite in such
depressed circumstances: restricting foreign access to a countrys assets
when its credit, but not that of others, has dried up. In South Korea, the
IMF also pushed for changes in the labour laws to make redundancies
easier although it is difcult to argue that this was necessary to solve the
nancial crisis and was seen as having more to do with engineering a
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 251
Table 1 External adjustment (US$ bn)
Current Account Merchandise Imports
1996 1998 Adjustment 1996 1998 Adjustment
19968 19968
Thailand 14.7 14.2 28.9 63.9 36.5 27.4
Malaysia 4.6 9.1 13.7 78.4 58.3 20.1
Indonesia 7.7 4.0 11.7 44.2 31.9 12.3
Philippines 4.0 1.3 5.3 31.9 29.5 2.4
Korea 23.0 40.6 63.6 144.9 90.5 54.4
Total adjustment 123.2 116.6
Source: Ferguson (2000).
transition to Anglo-American style capitalism than with solving South
Koreas crisis.
The perception that the IMF was acting to protect the interests of
Western lending institutions and to open Asian markets for Western rms
at the expense of Asian workers and the sovereignty of Asian countries
was widely held in the region. As Bello (as quoted in Higgott 1998: 345)
noted at the time never has the IMFs connection to its principal stock-
holder been displayed so prominently.
20
This view was not restricted to
leftist critics either. Bhagwati (1998), a prominent neoliberal economist,
also argued that what he termed the Wall Street-Treasury complex had
got it all wrong in pushing for speedy capital account liberalization in
Asia. The Wall Street-Treasury complex was not easily convinced of the
error of its ways, however, and its leading exponents added insult to
Asian injury by declaring, in triumphant mood, that the Asian crisis
proved the superiority of American free market capitalism over Asias
managed capitalism.
21
In the face of these policies and perceptions, it is not surprising to
nd that this has led, in Higgotts (1998) words, to the politics of resent-
ment. One manifestation of this resentment is that Asian countries have
embarked on a new path of regional economic cooperation incorporating
both monetary and trade dimensions. These forms of cooperation are
explained fully below. Before embarking on the analysis, it is important
to rst recognize that the degree of enthusiasm for the new regional
mechanisms and the intensity of the politics of resentment do vary by
government in the region.
22
As with all regional integration initiatives,
individual member countries may have varying motives for participating.
In the following discussion, the focus is on the broad contours of the
newly emerging regional arrangements followed by an in-depth analysis
of the two leading countries in the region, China and Japan.
3.2 The regional response
The idea of establishing an US$ 100 billion Asian Monetary Fund (AMF),
more attuned to the needs of Asian economies and less bent on imposing
Anglo-American style capitalism on the region, was initially proposed
by Japan at the height of the crisis. This received support from some of
the countries in Southeast Asia who were shocked by the initial refusal
of the US to support Thailand in its crisis and by the spectre of IMF
conditionality. The proposal was rejected, however, by the US as poten-
tially undermining the role of the IMF and as being potentially too lax
on conditionality, by the IMF itself, and by China which continued to
oppose Japans leadership aspirations in Asia.
23
Despite the immediate rejection of this plan, the failure of other regional
institutions such as ASEAN and APEC to play any signicant role in
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 252
responding to the crisis, and the widespread resentment at the imposi-
tion of conditions by a Washington-based, US controlled, international
institution, the IMF, more concerted regional initiatives have neverthe-
less more recently appeared. It should be noted that a regional response
was neither guaranteed nor perhaps even probable. On the assumption
that regional initiatives require a sufciently powerful and/or respected
regional leader, candidates for this position in post-crisis Asia were not
conspicuously evident. Japan rather belatedly began to pump money into
the region but was partly blamed for the crisis in the rst place. As
Higgott (1998: 336) notes Japanese capital created overcapacity in the
region without fullling the role of a market of last resort to absorb it.
Furthermore, the willingness of the Japanese government to allow the
yen to depreciate in the wake of the crisis led to accusations that Japan
was more interested in maintaining its own competitiveness than in solv-
ing Asias problems. Japans capitulation in the face of US pressure over
the initial proposal for an AMF did not enhance its leadership claims
and neither did its continuing domestic economic malaise.
24
Chinas 1994
devaluation of the renmenbi was seen as a contributing factor to the cur-
rent account decits run up by the ASEAN-4 and South Korea, decits
which played a key role in triggering currency ight in 1997. Although
China pointed to its maintenance of the value of the renmenbi during the
crisis, it continued to have less than cordial relations with its ASEAN
neighbours on other issues such as the Spratlys and, of course, there were
continuing cross-strait tensions with Taiwan. It is quite possible there-
fore, perhaps even probable, that regionalism would simply become a
spent force under the dual weight of the nancial crisis and the tarnished
images of possible regional leaders.
Interestingly, this has not happened and, after the initial rejection of
the AMF, closer monetary and trade ties are now being actively fos-
tered in the region; a new regionalism, geographically well-dened and
located in East Asia, involving all of the major countries of this region,
is now being forged.
25
As Bergsten (2000a) has noted, the East Asian
Economic Group has held summit meetings for three consecutive years
under the ASEAN+3 rubric (i.e. the ten ASEAN countries plus China,
Japan and South Korea) and a Vision Group has been formed to advise
on the future role and evolution of this group. Following rejection of the
initial Japanese proposal for an AMF, Japan implemented the Miyazawa
Plan which made available $30 bn to countries in the region. Subse-
quently, in May 2000, a regional network of foreign currency swaps aimed
at enabling Asian countries to address any future currency crises them-
selves without resort to the IMF was agreed. This development, a coop-
eration between central banks in the region, constitutes a de facto AMF,
providing a mechanism to meet the aims of an AMF but avoiding the
more politically difcult task of establishing a formal institution which
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 253
might encounter US opposition. This measure, adopted by the nance
ministers of the ASEAN+3 countries, expands the network of bilateral
regional currency deals previously agreed between Japan and Thailand
and between Japan and South Korea which had provision for loans
of up to $7.5 bn.
26
While details of the expanded plan are still vague
it is clear that Asia has the resources to nance such an initiative with
the collective reserves of the ASEAN+3 countries being over $800 bn
(over twice those of the Eurozone countries and close to ten times those
of the US).
27
Ofcials from Japans Ministry of Finance will also be
stationed in Thailand and Vietnam to provide advice on international
debt management, the use of yen loans and other economic issues.
28
At the same time as these developments in monetary regionalism,
there have also been initiatives to create free trade pacts in the region
spearheaded by Japan. These include studies being conducted examining
the possibility for a North East Asian regional trade agreement between
Japan, China and South Korea.
29
There have also been important bilat-
eral trade negotiations between Japan and Singapore and between Japan
and South Korea. This represents a considerable departure for Japanese
trade policy, and in South Koreas for that matter, as these two coun-
tries are the only members of the OECD which are not members of a
regional trade agreement (if APEC is excluded from such a designation)
and represents a sharp reversal of Japans previous exclusive reliance
on multilateral trade agreements.
In analysing the emergence of Asias new monetary regionalism, the
disenchantment with the IMF and the US has been widely recognized
and accepted. However, two important issues remain in need of further
analysis and which require a closer examination of the motives of the
two major powers in the region, namely Japan and China, without whom
a broad regional project would be difcult to sustain. The rst issue is
simply a lacunae in the existing literature, namely, why did China oppose
the proposal for an AMF in the immediate post-crisis period but sup-
port the currency swap arrangement some three years later? And what,
if anything, do the reasons for this change of position tell us about Asian
regionalism now? The second issue concerns the emergence of propos-
als for regional trading arrangements, proposals which analysts such as
Bergsten (2000a) and Noland (2000) have attributed mainly to Asian frus-
tration at the ineffectiveness of trade liberalization through APEC and
the uncertainties facing the new Millennium Round of the WTO after the
debacle in Seattle. Thus, much as the US was argued to have departed
from its sole reliance on the multilateral trade track in frustration at the
slow pace of the Uruguay Round in the late 1980s, history is now argued
to be repeating itself with Japan showing a similar interest in regional
liberalization initiatives in response to the frustrations over the slowness
of the Millennium Round in Seattle a decade later. In advancing such an
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 254
analysis, it is implicitly being argued that the monetary and the trade
dimensions of the latest round of Asian regionalism are essentially caused
by different factors and are responding to quite different external forces.
This assumption needs careful examination.
3.3 Chinas changed position on monetary regionalism
Let us rst consider Chinas position. Put simply, why should China,
which initially opposed the creation of an AMF for fear of Japanese dom-
ination, and which has sufcient foreign exchange reserves (in excess of
US$ 200 bn) and capital controls to ward off any speculative currency
attacks, now back an Asian only currency swap arrangement? To under-
stand this requires an analysis of the shifting sands of wider Sino-
U.S. and Sino-Japanese relations. Although China was not directly
affected by the Asian nancial crisis, indirectly the crisis posed signi-
cant challenges for China and its response to the crisis offered some
opportunities. The immediate challenge was how to respond to the crisis
affecting neighbouring countries. Chinas response was to provide nan-
cial resources to the region through the IMF and to pledge not to devalue
the renmenbi. In both of these ways, China sought to establish itself as a
bulwark for stability in the region and as a responsible member of the
international community, a responsibility which it hoped would be rec-
ognized and acknowledged by a strengthening of SinoUS relations. To
this end, China committed US$ 4.5 bn to the operational budget of the
IMF to support nancial packages to Thailand and Indonesia.
30
Thus,
China opposed the initial proposal for a Japan-led AMF, threw in its lot
with the IMF, and made its rst nancial contributions to IMF packages
since 1949. The second part of the strategy for demonstrating its inter-
national responsibility was the pledge not to devalue the renmenbi. This
undoubtedly had some domestic advantages; Chinas weak state-run
banking system was sitting on deposits in excess of 500 trillion yuan and
any devaluation which might spark a run on the banks could have poten-
tially serious consequences for economic and social stability.
31
Further-
more, Hong Kong had just been returned to China and the leadership
in Beijing was keen to provide economic stability in the new Special
Administrative Region. However, there is no doubt that the no deval-
uation policy also had risks in that the painful process of state owned
enterprise reform had begun and, in the leaderships view, needed to be
accompanied by an economic growth rate of at least 8 per cent p.a. in
order to prevent a potential social backlash. The policy of maintaining
the value of the renmenbi made such a growth target difcult to meet in
the light of falling regional trade volumes and depreciating currencies
in competitor economies in ASEAN and South Korea. Nevertheless, the
Chinese leadership decided to maintain the exchange rate and to inject
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 255
additional demand into the domestic economy through a massive infra-
structure spending programme.
The stability which Chinas no devaluation policy brought to the
crisis economies in the region, together with its support for the IMF,
was expected, in the calculations of the Chinese leadership, to lead to a
rehabilitation of China as a responsible member of the international
community and to an enhanced regional and international role. This
recognition, however, appears to have been slow in coming. For example,
at the APEC Summit in Vancouver 1997, Chinas role in was, in Chinas
eyes, undervalued. Chinese academics argued that:
in its strategy to solve the Southeast Asian nancial crisis, the
United States has not fully recognized the importance of China. On
24 November last year, at a press conference in Vancouver, Clinton
suggested a three-point plan to solve the crisis, but he overlooked
the role of China, which had not been affected by the crisis.
32
Chinas feeling that its constructive strategic partnership relationship
with the US ought to be reaping more rewards in terms of international
recognition was given chance for further expression and correction in
June 1998. It was in this month that the Japanese yen slid to a seven-
year low against the US dollar prompting fears of a new round of
nancial turmoil in Asia. It was also the month that President Clinton
made an ofcial visit to China, when the Chinese side at least, expected
some breakthrough on Chinas WTO accession process.
33
The continued
depreciation of the yen provided China with another opportunity to
contrast its policy of responsible exchange rate management with that
of Japan which was accused of failing to shoulder its responsibility as
a major power.
34
In the end, Japan and the US were forced to intervene
to support the yen although not before concerns were expressed about
why the two countries had taken so long to undertake such an inter-
vention. Japans non-intervention could be understood simply in terms
of it wishing, in Chinas eyes, to ofoad its economic problems onto
other countries. The reasons for US reluctance drew upon analysis from
elsewhere in the region in arguing that the U.S. would gain by being
able to buy up Asian enterprises with over-valued dollars.
35
China did nevertheless have the pleasure of drawing President Clinton
on his ofcial visit into criticism of Japans exchange rate policy.
36
China
continued to promote its own role in solving the crisis and in using the
opportunity to enhance its claims for greater international recognition.
As Wang Menkui, Director of the State Councils Development Research
Centre, indicated:
Through the crisis, Chinas image as a major power has become
even more prominent . . . In the multipolar development of one
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 256
superpower and many great powers, China, as one of the great
powers, is still not powerful enough. This crisis has conspicuously
shown that China has taken a step forward on the path to becoming
a major power in the world structure.
37
Chinese sensitivities were assuaged at the December 1998 APEC Meeting
where, in contrast to the neglect of Chinas role by President Clinton in
Vancouver a year earlier, the Chinese press reported that the Kuala
Lumpur declaration fully afrmed the mainstay role played by China
in stabilizing the Asian economy during this nancial crisis. The docu-
ment used the English word anchor to describe the role played by
China in stabilizing the Asian nancial crisis.
38
Thus, for the year and half after the outbreak of the nancial crisis
China had followed a consistent policy of supporting the IMF (and its
policies)
39
and of maintaining a no devaluation policy for the renmenbi,
a policy which it contrasted sharply with that of Japan. China did partic-
ipate in the ASEAN+3 meetings but the main focus of its diplomacy was
on promoting itself both inside and outside of the region as a major
power that could be trusted and which acted responsibly.
40
The expected
gains from this policy were not only economic an economic recovery
in the region but also political in terms of an enhanced role and status
for China in regional and international affairs. These gains were slow
in coming as China met with what it perceived as US indifference and
a lack of understanding of the strains that the no devaluation policy
was placing on its economy while Japan and the US moved only slowly
to resolve their exchange rate imbalances.
Despite the expectations that the US would offer some WTO conces-
sions this did not occur and it was left to Chinese Premier Zhu Rongji
to visit the US in early 1999 to offer more concessions to kickstart the
negotiations. However, the policy of seeking to strengthen the SinoUS
relationship was soon to come to an end not because of economic issues
but because of the US-led NATO war in Kosovo. This war, premised on
the need to defend human rights in a sovereign state, deeply worried
the Chinese leadership. The bombing of the Chinese Embassy in Belgrade,
and the wrong map explanation, led to anti-US riots in China much as
there had been similar riots in South Korea, Thailand and Indonesia
against IMF/U.S. economic policy earlier. The Cox Report and the demo-
nization of China in the US meant that Chinas responsible image
disappeared; by mid-1999 SinoUS relations had turned irrevocably for
the worse. Chinas post-crisis policy had not reaped the political gains
that it had hoped for; put simply, China had backed the wrong horse.
Faced with this changed international situation, China joined others
in the region as seeing the US as the main threat to its interests and
China moved to view regional solutions as more valuable in this changed
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 257
context. In reporting on the currency swap agreement, reached in May
2000, Chinas awakened interest in regional economic solutions was
clearly shown. Thus, the Economic Daily reported the agreement in the
following terms:
In the past, the importance of economic co-operation was not fully
realized. Compared with other parts of the world, especially North
America and Europe, economic co-operation within Asia lagged in
the past 10 years. Asia-Pacic Economic Cooperation, a regional
organization, is only a forum; it lacks binding force. However, the
nancial crisis that devastated the region three years ago has made
Asian countries realize the pressing need for working together.
Many Asian countries may still hold bitter memories of receiving
loans from the International Monetary Fund . . . The combined for-
eign exchange reserves of Japan, China, Singapore and South Korea,
and Hong Kong and Taiwan regions is US$ 800 billion, money that
will denitely promote the economy in Asia if managed well.
41
China had joined ranks and become a member of the Asia-only move-
ment, and Sino-Japanese relations have begun to show the signs of
improvement which make such a movement possible.
42
3.4 Japans changed position on trade regionalism
With respect to the second issue, the emergence of proposals for trade
regionalism in Asia, it is interesting to wonder why Japan, an initiator
of many of these proposals, should embark upon such a path. Japanese
policy had for years been to support the overseas investment activi-
ties of its MNCs and to fashion a regional division of labour in Asia
based on the so-called ying geese model of economic integration. Such
a policy had been reasonably successful and, indeed, was one of the fac-
tors which many analysts had pointed to as constituting an emerging
integrated regional economy led by the activities of businesses in the
region. To push this integration into the realm of formal free trade
arrangements was a major initiative with debatable pay-offs. For exam-
ple, in pursuing a bilateral trade agreement with Singapore, there was
much more to be gained by the small, close to free trade, economy of
Singapore by having improved access to the Japanese market than vice
versa. In the case of the bilateral discussions with South Korea, there is
the tricky question of the agricultural sector. Should this be included
with the risks that this might have of a political backlash from agricul-
tural interests in both countries or should it be excluded at the risk, as
Noland (2000: 7) points out, of inviting WTO investigation of compliance
with Article XXIV of the GATT?
43
Including China in with South Korea
opens up even more problems with countries at vastly different levels
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 258
of economic development and with different political systems. Clearly,
there are many stumbling blocks on the road to trade agreements in the
region and Japans decision to travel down this particular road is in need
of explanation.
The answer that the explanation is to be found in Japans, and Asias,
disappointment following the fallout of the failed Seattle WTO talks is
not convincing. For one thing, the trade initiatives predate the Seattle
conference. More fundamentally, while Japan has always been a central
supporter of the multilateral trade liberalization process, its commitment
to liberalization has always been practical and strategic rather than ideo-
logical. That is, trade liberalization has been an important policy goal of
Japan but this has been conditioned by its pursuit of the developmen-
talist model in which free trade is not presumed to be the most desirable
policy in all circumstances and, in a non-insignicant number of cases,
is actually a clearly undesirable policy. In initiating regional trade liber-
alization, the question that must be asked is whether this also implies
a rejection of the developmentalist view. That is, the place of regional
free trade initiatives must be analysed within the wider context of
Japanese economic policy objectives.
A more convincing explanation for the trade initiatives is to be found,
I suggest, in (1) the benets which regional economic arrangements might
have in terms of spurring regional economic growth within the context
of Japans long standing support for a developmentalist structuring of
the regional economy, and (2) equally importantly, increasing Japans
(and Asias) political bargaining power at the international level.
Consider rst how Japans support for regional trade agreements may
be consistent with its longer-term strategy. Commenting on reactions to
the Asian nancial crisis, Hughes (2000: 23540) has noted that:
policy makers in Japan do not seem to see the [developmental] state
model as a total write-off. The key to recovery is still the basic model
of the developmental state in the region and export growth on the
demand side. Export growth can be restarted through economic
stimulus packages in Japan and continued growth in the USA, but
even more importantly through the promotion of the intra-regional
exports which accounted for so much growth in the region prior to
the currency crises and which could sustain growth long term.
It is in this context that Japans turn to bilateral trade agreements must
be understood. As a recent (then) MITI Report (2000b: ch. 3) indicates,
bilateral and regional trade agreements are seen as key mechanisms for
increasing intra-regional exports; it notes that this has been the out-
come of existing regional agreements such as the EU, NAFTA and the
MERCOSUR. The Report further argues that the Asian economies
continue to be integrated with Japan supplying the capital goods for
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 259
Asian industrialization (with capital goods comprising between 40 to 60
percent of East Asias imports) and the market for Asian exports, espe-
cially those from Japanese afliates in Asian countries whose exports
back to Japan now constitute 30 percent of Japans total imports. This
pattern of regional integration, approximating the familiar ying geese
pattern, has helped, it is argued, to restore economic growth in both
Japan and the rest of East Asia following the nancial crisis. The Report
(2000b: ch. 3) notes that Japanese exports to East Asia recovered more
quickly than exports to other regions [and]. . . . As the Japanese economy
has recovered, imports from Asia have recovered more rapidly than
those from other regions. The implications of this are, in MITIs (2000b:
ch. 3) view, that:
the Asian recovery set in motion a virtuous circle, boosting Japanese
exports, helping to place Japan on a recovery trajectory, and conse-
quently stimulating Asian exports to Japan. Further this stimulation
of East Asian export activities has produced considerable synergy,
for example pushing regional trade toward recovery due to regional
specialization within East Asia. The deepening interdependence
between Japan and East Asia through trade has therefore helped
to accelerate recovery from the currency and economic crises.
The new interest in regional trade initiatives therefore stems from a
desire to maintain the momentum of this virtuous circle and to con-
tinue to forge deeper patterns of regional economic specialization. The
shift towards bilateralism can be seen, therefore, as a change of policy
mechanism but not necessarily of policy objectives; the policy of forging
a regional division of labour with Japanese capital and technology at the
centre of the integration process remains consistent with Japanese pol-
icy over the past two decades although the means of achieving it have
now broadened to include regional trading agreements as an important
post-crisis vehicle.
44
With respect to the broader issue of promoting regional arrange-
ments as a way of increasing bargaining power within the global econ-
omy, MITIs White Paper on International Trade for 1999 (published before
the Seattle meetings) gives an important clue to this. It argued for the
creation of a Northeast Asian trade bloc and recommended (MITI, 1999:
46) that:
Japan should seek to deepen intra-regional exchange and under-
standing in Northeast Asia, the only area in the world which has
shown little interest in regional cohesion or integration, applying
itself with greater vigour to the development of regional cohesion
and presenting a model to the world which will contribute posi-
tively to the strengthening of the multilateral trading system.
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 260
The key point here is the last part of the sentence referring to the pre-
sentation of a model to the world. Multilateral negotiations have in
important ways been directly shaped by regional agreements. That is,
the existing regional agreements have formed the basis of negotiation for
some parts of multilateral agreements. For example, the information tech-
nology agreement adopted by the WTO in Singapore in 1996 was based
on a similar agreement adopted under US pressure in APEC a few months
earlier. Many of the provisions of the ill-fated MAI had as their starting
point chapter 11 of the NAFTA. Thus, regional agreements have increas-
ingly been used as the point of departure for multilateral negotiations.
Such agenda setting mechanisms clearly benet the US and Europe both
of whom have reams of legal text to call upon as a result of their exist-
ing regional arrangements. Japan had none and, as a result, found itself
debating on others chosen ground. The need to develop its own model
of regional arrangements to present to the world was therefore an impor-
tant factor in persuading Japanese policy-makers of the need to go down
the potentially tortuous path of bilateral and regional trade agreements.
The importance of regional economic arrangements as having polit-
ical pay-offs is also evident from MITIs subsequent analysis. Here
Japans multi-layered approach is justied (MITI, 2000b: ch.2, p.9) on
the grounds that:
recently, interest has emerged in trade liberalization beyond tradi-
tional regional frameworks, namely the strengthening of links
between regional groupings. Examples include the Free Trade Area
of the Americas (FTAA), designed to link the US and Latin America,
the Trans-Atlantic Free Trade Area (TAFTA) between the US and
the EU, moves to conclude a free trade agreement between Mexico
and MERCOSUR, and consensus on a free trade agreement between
Mexico and EU. Factors behind this new trend are as follows:
(1) further promotion of free trade liberalization through the cre-
ation of frameworks beyond traditional regional groupings; (2) pro-
motion of access to extra-regional markets; and (3) the desire to
strengthen inuence over other regional groupings and negotiating
power with these.
Japan, as noted, operating without membership of a regional trade
agreement, is unable to play and must stand by as the US and Europe
strengthen [their] inuence over other regional groupings (MITI, 2000b:
ch.2, p.9). Japan has signalled that it, too, wishes to enter this game.
Further evidence can be found in the September 2000 Report of the
Joint JapanSingapore Study Group. This Group (2000a: ch 1, p.2),
set up in December 1999 to look at a possible FTA between the two
countries, noted that
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 261
there are different motivations for the pursuit of regional economic
integration. Some countries see such agreements as strategic
alliances, while others leverage on them to obtain more secure and
favourable access to important markets. In some cases, they have
also helped to promote policy reforms.
Again the importance of FTAs as bargaining tools with other
countries/regions is evident. Furthermore, the Study Group (2000a:
ch 1, p.3) argued that FTAs can be a testbed for new and innovative
models of rules governing economic activity. These can subsequently be
adapted for global use. FTAs can therefore provide positive comple-
mentary pressure for the evolution of WTO agreements. The Study
Group therefore deliberately proposed an approach that went beyond
traditional free trade agreements and which could inuence the WTO in
areas where either there are no rules yet in the WTO or the existing
WTO rules can be further improved upon (2000a: ch 3, p.8).
45
The inten-
tion to use a bilateral agreement as a springboard for multilateral nego-
tiations is again in evidence with Japan, in consort with other Asian
countries, serving notice that they wish to play a larger role in deter-
mining the rules which govern the global economy, rules which have to
date relied excessively on the US and Europe for their formulation.
Thus, the view has emerged, stemming directly from the experience
of Asian countries in the wake of the nancial crisis, that the existing
international institutions and the balance of power within the global
economy leave Asia vulnerable to the interests of the West, especially
the US Enhanced regional initiatives offer Asia the potential of coun-
tering these interests. This was expressed forcefully by ASEAN
Secretary-General Rodolfo C. Severinto (1999) who argued that:
a new world order has not yet arrived, in which the interests are
balanced and disputes adjudicated fairly under benign rules that
are impartially applied and effectively enforced upon all. It is all
too clear that such a utopia remains far from being upon us. Until
it arrives, a long, long time from now, if ever, economic power,
whether of states or of corporations, will continue to have prepon-
derant advantage. In the face of this, weaker states must band
together regionally, strengthening their solidarity and advancing
their common interests.
In other words, the rules of the game reect the interests of those
who wrote them and favour the powerful rather than establish a level
playing eld; post-crisis Asian regionalism is the response to this.
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 262
4 CONCLUSIONS
If, as has been advanced in this paper, Asias post-crisis regionalism
is qualitatively different from that which preceded the crisis, and is
premised on an Asia-only vision of economic cooperation forged to coun-
ter the power of the US and Europe, then there a number of important
implications. One concerns whether the regional initiatives now under-
way in Asia will reach fruition or whether external opposition from the
US or internal rivalries between Japan and China will intensify and
thereby threaten to derail the regional project.
46
Another issue concerns
the emergence of a three bloc world, a development which has already
been noted by Bergsten (2000a). Important as these issues are, our atten-
tion here is focused on the implications of Asias post-crisis regionalism
for our understanding of the dynamics of the contemporary international
political economy.
The widely preferred term of analysis to describe the contemporary
world has been that of globalization. While this has spawned an entire
academic and popular industry, it can be summarized for our purposes
as an analysis of the world which views the current phase of international
capitalism as being qualitatively different from earlier phases and as being
characterized by a shift in power from nation states to transnational eco-
nomic actors and forces. It is a story of markets gaining at the expence
of states. For pro-globalists this offers the prospect of a more efcient
global allocation of resources and of more effective constraints on inter-
ventionist and arbitrary state action. For anti-globalists it offers the
prospect of the erosion of sovereignty and the levelling down of social
and environmental standards as global corporations gain greater power
at the expense of ordinary citizens and their elected representatives. While
these two groups may disagree about the desirability of the changes, they
agree on the basic dynamics at work. Seen through this lens, the Asian
nancial crisis can be interpreted, as Price (2000) has argued, as a crisis
of globalisation. It is about states losing too much power to international
nancial markets and about the attempts of nation states to regain lost
controls. Certainly, the monetary regionalism of the post-crisis period can
be seen exactly in this light, as an attempt by nation states to re-regulate
global nance. This is also evident from MITIs (1999: 32) analysis:
Because the Asian currency crisis shares more of the characteris-
tics of 1990s-style currency crises, which are generally sparked by
massive capital movements, the usual measures will be inadequate
in preventing a recurrence. Rather, consideration of new interna-
tional nancial system reforms (taxes on capital inows and out-
ows, etc.) should be promoted in order to open the way for stable
real economy development in developing countries, which lack the
resilience and exibility of developed countries.
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 263
Aside from the support for international capital taxes, this analysis is
interesting precisely for its conceptualization of the problem as one of
insufcient state power, particularly in the case of developing country
states. Regional and international regulations are therefore necessary to
strengthen the ability of states to confront destabilizing global market
forces.
However, this is not the only analytical framework on offer. The
subtitle of this paper refers not simply to bringing the state back in to
the analysis of regional integration in the Asian region. It also refers
more broadly to the need to locate the state centrally in any analysis of
the dynamics of the current phase of international capitalism, a phase
in which some states have lost power to markets but in which, crucially,
some states have not. Laxer (n.d.) has preferred the term globalism to
globalization, stressing that globalism is an ideology, one that is based
on neoliberalism and the Washington consensus as integral parts of US
foreign policy. This theme is developed further by Petras and Veltmeyer
(2000) who prefer the term imperialism to globalization as a more
accurate description of the contemporary world. In this analysis, it is
not the interdependence of economies and the erosion of state power
vis--vis markets which are the relevant points of reference but the
continued domination of global markets by the major powers, most
notably the US but also Europe, the use of international nancial insti-
tutions as tools in the hands of these powers and the market-opening
strategies of the imperialist powers that are the focus of attention.
47
Asias
post-crisis regionalism also nds resonance with this analysis in the sense
that regionalism is being forged to prevent the US and the international
nancial institutions from exercising their power and shaping Asian
economies in their interests as they did in the aftermath of the currency
crises. That is, a central reason why it is necessary to bring the state
back in to the discussion is precisely because power relations between
states are critical to understanding that an important part of Asias post-
crisis regional project is to keep the United States out.
NOTES
1 I am grateful to the Social Sciences and Humanities Research Council of
Canada for the funding which made this research possible. I am also grateful
to Osvaldo Croci, Satoshi Ikeda and Brian MacLean for their comments on
the paper.
2 Asia refers here to the countries of East and Southeast Asia. For consis-
tency, the term Asia is therefore used in the same way that it has typically
be used in analyses of the Asian nancial crisis. South Asian countries do
not, therefore, form part of the analysis presented here.
3 For discussion of the ways in which regionalism has been adapted to meet
different objectives see, for example, Lawrence (1994).
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 264
4 The importance of this emergence has also been remarked upon by Fred
Bergsten, Director of the Institute for International Economics in Washington
D.C., who, writing from a different perspective, has argued (2000b: 23) that
the most striking changes in the world trading system, especially in the
short-run, are not likely to ow from the World Trade Organisation or
the proposed mega-regional arrangements, such as the Free Trade Area
of the Americas or an expanded European Union. Instead, they will proba-
bly come from the host of sub-regional trade agreements now being busily
negotiated by Japan, South Korea, Singapore and other countries in East Asia.
Virtually unnoticed by the rest of the world, East Asian countries are getting
together to make their own economic arrangements.
5 Some of the evidence in favour of the emergence of a regional economy,
indeed, was based on the use of gravity models of trade which analysed
regional trade bias and ignored state sponsored initiatives all together;
regions were viewed as natural, derived from trade data alone. For an
example of this type of analysis, see Frankel (1991). For a critique of this
approach see Bowles and MacLean (1996b).
6 For a discussion of the changing of FDI role in Japans economic policy see,
for example, Bowles and MacLean (1996a).
7 On the differences between APEC and the EAEG as conceptions of the Asian
region, see Higgott and Stubbs (1995).
8 For discussion of these characteristics as typical of regionalism during the
late 1980s-mid 1990s see Bowles (2000).
9 For an analysis of this process, and its ideological underpinnings, see
Cumings (1993) and Woodside (1993).
10 APECs originally had 12 members at its formation in 1989 (Australia,
Canada, Japan, New Zealand, South Korea, the US and the six members of
ASEAN). Since then China, Taiwan, Hong Kong, Mexico, Papua New Guinea,
Chile, Vietnam, Peru and Russia have also joined bringing membership to
21 economies.
11 This discussion of AFTAs origins draws on Bowles (1997).
12 Quoted from the Joint Communique of the ASEAN Ministerial Meeting
(1991).
13 This is further conrmed by ofcial pronouncements at the time. For example,
Singapores Prime Minister Goh Chok Tong commented that unless ASEAN
can match the other regions in attractiveness both as a base for investments
and as a market for their products, investments by multinational companies
are likely to ow away from our part of the world to the S[ingle] E[uropean]
M[arket] and NAFTA. Quoted in the Straits Times, Singapore, 28 January,
(1992), p. 22.
14 It is estimated that private capital ows to the ASEAN-4 plus South Korea
went from a net inow of US$ 93.8 bn in 1996 to a net outow of US$ 6 bn
in 1997. See MITI (1999: 3).
15 For the most comprehensive set of materials on the nancial crisis, see
the website put together by N. Roubini <http://www.stern.nyu.edu/
globalmacro/>.The discussion here draws upon MacLean et al. (1999).
16 The nancial package put together involved loans made by the IMF, the
World Bank, the Asian Development Bank and by other countries.
17 See Radelet and Sachs (1998).
18 See Krugman (1998). For an analysis of how Krugmans crony capitalism
hypothesis emerged and became the dominant explanation of the crisis see
MacLean (1999). In general, there has been an intellectual appeal to viewing
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 265
the Asian crisis as caused by a single dominant factor. This overlooks the
fact that crises may have different causes in different countries and, in partic-
ular, that there might be differences between those countries in Southeast
Asia and that of South Korea in North Asia. For a country specic analysis
of South Korea see, for example, Haggard and Mo (2000).
19 See Ferguson (2000) for a useful compilation of statistics on the nancial
crisis in Asia and on the relative magnitudes of the crises in Asia and Latin
America.
20 See also Gill (1999) who argues that the Asian crisis has been a means for
the United States to strengthen its strategic interests worldwide.
21 As an example of such triumph see, for example, Federal Reserve Chairman
Alan Greenspans (1998) comments.
22 The analysis is restricted here to state-level responses to the crisis, on the
grounds that this is most relevant for analysing the regional arrangement s
discussed below. In other contexts, other levels of response might be more
appropriate to analyse. For discussion of working-class responses see, for
example, McNally (1998).
23 For opposition to the AMF see Noland (2000).
24 For discussion of Japans role in the crisis, as seen by both Japan and other
countries, see Hughes (2000).
25 The position of Taiwan does, however, remain ambiguous.
26 See, E Asia Nations to Agree to Swap Currency Reserves, Nihon Keizai
Shimbun, 29 April (2000).
27 See Bergsten (2000a) and Dieter (2000).
28 See IMF to send Finance Advisors to SE Asian Nations, Nihon Keizai Shimbun,
2 July (2000). A referee has contributed that, based on his/her interviews
with Japanese ofcials at the Ministry of Finance, Japan now supports a
region of nancial stabilisation and that the appointment of Japanese of-
cials in Thailand and Vietnam are the rst moves to establishing the know-
ledge network that will be required for this scheme to mature into an IMF
equivalent. I am grateful to the referee for passing on this information.
29 This raises the interesting possibility that any such Northeast Asia bloc could
eventually join up with AFTA thereby creating a full East Asia bloc.
30 See Chinas Policy on Asian Financial Crisis Interviewing Dai Xianglong,
Governor of the Peoples Bank of China, Ta Kung Pao, Hong Kong, 4
November (1998), as in FBIS-CHI-98313.
31 The social and political risks attached to a devaluation were acknowledged
by Li Ruihuan, a member of the CPCs Central Committee Political Bureau.
See Beijing: Stability is First Priority; Currency Will Not Be Devalued, Wen
Wei Po, Hong Kong, 27 January (1999) as in FBIS-CHI-99027.
32 See Article on Sino-US Financial Cooperation, Zhongguo Tongxun She, Hong
Kong, 3 June 1998 as in FBIS-CHI-98154.
33 This expectation was noted in an interview by Chinas chief WTO nego-
tiator, Long Yongtu. See CRI Interview With Long Yongtu on WTO, China
Radio International, 8 January (1999) as in FBIS-CHI-99008.
34 See Japan Should Shoulder the Responsibility of a Major Power, Renmin
Ribao, 29 July (1998) as in FBIS-CHI-98225.
35 See, for example, Wang Dajun (1998).
36 As Hughes (2000: 233) notes, Japans sense of humiliation was . . . com-
pounded during the US-China summit . . . when Presidents Bill Clinton and
Jiang Zemin took the extraordinary step of commenting in a bilateral setting
on the decient management of the yen and Japans economy.
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 266
37 See China Makes Preparations for Introduction of Euro; Wang Mengkui
Analyzes Its Pros and Cons, Saying China Will Not Change All Its US Dollars
Into Euro, Ta King Pao, Hong Kong, 11 October (1998), as in FBIS-CHI-
98294. The presumed increased importance of China in U.S. policy as a
result of the Asian crisis is also highlighted in Chinese press articles at the
time of President Clintons June 1998 state visit to China. For example, an
article by Li Zhengxin (1998) argues that President Jiang Zemins successful
visit to the United States last year caused Sino-US relations, which had been
at a crossroads, to make a directional change . . . Now, eight months later,
US President Clinton will also make a visit to China. This not only indicates
that the United States hopes to maintain the momentum of improvement
and development in Sino-US relations, but also that there is a deeper consid-
eration, namely that while structurally adjusting its Asia strategy, the United
States is elevating Chinas status in its Asia-Pacic formula . . . In recent
years, the United States has begun to realize that in order to deal with any
major problem within the Asian region, it is rst necessary to have Chinas
understanding and co-operation. The Asian nancial crisis has further
strengthened this realization of the US government.
38 See Subject of Talks Brought About by Financial Crisis Senior Ofcial
Zhang Yan on 98 APEC Kuala Lumpur Conference, Shijie Zhishi, Beijing, 1
January (1999), p. 33.
39 Chinas central bank Governor Dai Xianglong declared in November 1998
that Thailand and South Korea had adopted and properly implemented
many of the reform measures recommended by the IMF, which have pro-
duced positive results. Besides, the governments actions have won the under-
standing and support of the public. In particular, I saw many civilians in
the ROK donating their gold rings. This is why the conditions in these two
countries are turning for the better. (Chinas Policy on Asian Financial Crisis
Interviewing Dai Xianglong, Governor of the Peoples Bank of China, Ta
Kung Pao, 4 November 1998, as in FBIS-CHI-98313.) Presumably, these were
not the same members of the public interviewed one month later by a survey
team in South Korea. This poll (Chong Chae-yong, 1999) found that over
half of the people have a negative view of the IMF, for example perceiv-
ing it simply as an international organization representing the interests of
advanced countries, rather than as an international nancial organisation
that is helping us. Moreover, 57 percent gave a dissatised response con-
cerning the IMFs ROK-related activities over the last year. Concerning our
governments diplomacy with the IMF, over half consider it inappropriate
and humiliating.
40 Chinas diplomatic efforts also included a framework for long-term cooper-
ation between China and Thailand, the rst time such a framework had been
established with an ASEAN country. See Chongkittavorn (1999).
41 Economic Daily, 14 May (2000).
42 As an example of this improvement, contrast the visits of senior Chinese
leaders to Japan. In December 1998 President Jiang Zemins visit was punc-
tuated with the Premier informing his hosts of their need to acknowledge
and apologize for their wartime atrocities in China. When Chinese Premier
Premier Zhu Rongji visited in October 2000, however, this long-standing
thorn in the side of improving Sino-Japanese relations was apparently down-
played. In Japan, this was interpreted in the press (Hasegawa, 2000) as
indicating that China desires cooperation between the two nations in order
to survive the century as a major economic power capable of challenging
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 267
the US. The possibility of riding such a wave as a leading partner is an irre-
sistible draw for Japan.
43 Article XXIV of the GATT requires that regional trade agreements cover
substantially all sectors.
44 If this policy is successful then, as Hughes (2000: 251) notes, the actual
outcome of the East Asian currency crisis may not be to undermine Japanese
leadership and the model of the developmental state in the region, but,
against all expectations, actually to consolidate them.
45 The areas identied in this context were electronic commerce, denition of
service providers, non-tariff measures, investment, mutual recognition, anti-
dumping and consultation and dispute settlement.
46 A referee suggests that, in addition to the reasons for the Japan-Singapore
free trade initiative outlined above, a further dimension may be Japans
desire to strengthen its position in Southeast Asia relative to China.
47 As Higgott (1998: 345) notes the utilisation of impartial multilateral agen-
cies has long been seen as an important way to put at one remove or
depoliticise US policy interests in the imposition of economic conditions
on developing countries.
REFERENCES
Bergsten, C. F. (2000a) The New Asian Challenge, Institute for International
Economics, Working Paper 004, March, available at <http://www.iie.com/
CATALOG/WP/2000/004.html>.
Bergsten, C. F. (2000b) Towards a Tripartite World, The Economist, 1521 July.
Bhagwati, J. (1998) The Capital Myth: The Difference Between Trade in Widgets
and Trade in Dollars, Foreign Affairs, 77(3): 712.
Bowles, P. (1997) ASEAN, AFTA, and the New Regionalism, Pacic Affairs,
70, 2: 21933.
Bowles, P. (2000) Regionalism and Development After(?) the Global Financial
Crisis, New Political Economy, 5(3): 43355.
Bowles, P. and MacLean, B. (1996a) Regional Blocs: Will East Asia Be Next?,
Cambridge Journal of Economics, 20: 393412.
Bowles, P. and MacLean, B. (1996b) Understanding Trade Bloc Formation: The
Case of the ASEAN Free Trade Area, Review of International Political Economy,
3(2): 31948.
Chong, Chae-yong (1999) An Opinion Poll on IMF Activities 49.4 percent Say
the IMF Is a Mouthpiece of Advanced Countries Interests, WIN, Seoul,
December, as in FBIS-EAS-98356.
Chongkittavorn, K. (1999) Thai Policy Meets China Challenge, The Nation,
Bangkok, 2 February 1999, as in FBIS-EAS-99033.
Cumings, B. (1993) Rimspeak; or, The Discourse of the Pacic Rim, in A.
Dirlik (ed.) Whats In a Rim? Critical Perspectives on the Pacic Region Idea,
Boulder, Colorado: Westview Press, pp. 2947.
Dieter, H., (2000) Asias Monetary Regionalism, Far Eastern Economic Review, 6:
30.
Ferguson, R. (2000) Tale of Two Continents: A Comparison of Asia and Latin
American Experiences during Recent Financial Turmoil, remarks before the
National Economic Association, Boston, Massachusetts, 7 January, available
online at: <http://www.federalreserve.gov/boarddocs/speeches/2000/
20000107.htm#exhibits>.
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 268
Frankel, J. (1991) Is Japan creating a yen bloc in East Asia and the Pacic?
paper presented to the NBER conference on Japan and the U.S. in Pacic Asia,
Del Mar, California, 35 April.
Gill, S. (1999) The Geopolitics of the Asian Crisis, Monthly Review, 50(10): 19.
Greenspan, A. (1998) The Ascendancy of Market Capitalism, remarks before
the Annual Convention of American Society of Newspaper Editors, Washington
D.C., 2 April. Available online at: <http://www.bog.frb.fed.us/boarddocs/
speeches/19980402.htm>.
Haggard, S. and Mo, J. (2000) The Political Economy of the Korean Financial
Crisis, Review of International Political Economy, 7(2): 197218.
Hasegawa, M. (2000) Sino-Japanese Ties on the Mend, Nikkei Weekly, 16 October.
Higgott, R. (1998) The Asian Economic Crisis: A Study in the Politics of
Resentment, New Political Economy, 3(3): 33356.
Higgott, R. and Stubbs, R. (1995) Competing Conceptions of Economic Regional-
ism: APEC Versus EAEC in the Asia Pacic, Review of International Political
Economy, 2(3): 51635.
Hughes, C. (2000) Japanese Policy and the East Asian Currency Crisis: Abject
Defeat or Quiet Victory?, Review of International Political Economy, 7(2): 21953.
Krugman, P. (1998) What happened to Asia?, available online at: <http://
web.mit.edu/krugman/www/DISINTER.html>.
Lawrence, R. (1994) Regionalism: An Overview, Journal of Japanese and Inter-
national Economics, 8(4): 35687.
Laxer, G. (no date) The Movement That Dare Not Speak Its Name: The Return
of Left Nationalism/Internationalism, mimeograph.
Li Zhengxin (1998) Focus on China My Views on the United States
Adjustments to its Asia Strategy, Shijie Zhishi, 16 May 1998, as in FBIS-CHI-
98159.
MacLean, B. (1999),The Transformation of International Economic Policy Debate
199798, in B. MacLean (ed.) Out Of Control, Toronto: James Lorimer,
pp. 6794.
MacLean, B., Bowles, P. and Croci, O. (1999) East Asian Crises and Regional
Economic Integration, in A. Rugman and G. Boyd (eds) Deepening Integration
in the Pacic Economies, Cheltenham: Edward Elgar, pp. 1954.
McNally, D. (1998) Gobalization on Trial: Crisis and Class Struggle in East Asia,
Monthly Review, 50(4): 114.
MITI (1999) White Paper on International Trade 1999, English Executive Summary,
Tokyo: MITI.
MITI (2000a) Japan-Singapore Economic Agreement for a New Age Partnership,
Released 29 September, Tokyo: MITI.
MITI (2000b) The Economic Foundations of Japanese Trade Policy Promoting a Multi-
Layered Trade Policy, White Paper, Tokyo, Released 22 August.
Naughton, B. (ed.) (1997) The China Circle: Economics and Technology in the PRC,
Taiwan and Hong Kong, Washington, DC: Brookings Institution Press.
Noland, M. (2000) Japan and the International Economic Institutions, paper
prepared for the Centre for Japanese Studies (Macquarie University) Fifth
Biennial Conference, Can the Japanese Change? Economic Reform in Japan,
Sydney, Australia, 67 July.
Petras J. and Veltmeyer, H. (2000) Globalisation or Imperialism?, Cambridge
Journal of International Affairs, XIV(1): 3248.
Price, J. (2000) Economic Turmoil in Asia: A Crisis of Globalization, in S. McBride
and J. Wiseman (eds) Globalization and Its Discontents, London: Macmillan,
pp. 18799.
BOWLES: ASIAS POST-CRISIS REGIONALISM
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 269
Radelet, S. and Sachs, J. (1998) The East Asian Financial Crisis: Diagnosis,
Remedies, Prospects, Brookings Papers on Economic Activity, vol. 1, Washing-
ton, DC, pp. 190.
Rodolfo C. Severinto, H. E. (1999) Regionalism: The Stakes for South-East Asia,
Address delivered in Singapore, 24 May, at ASEANWEB.
Stubbs, R. (1995) Asia-Pacic Regionalization and The Global Economy: A Third
Form of Capitalism?, Asian Survey, XXXV(9): 78597.
Wang Dajun (1998) Doing Harm to Neighbours or Pulling Together in Times
of Trouble?, Liaowang, Beijing, No. 26, 29 June 1998 as in FBIS-CHI-98195.
Woodside, A. (1993) The Asia-Pacic Idea as a Mobilization Myth, in A. Dirlik
(ed.) Whats In a Rim? Critical Perspectives on the Pacic Region Idea, Boulder,
Colorado: Westview Press, pp. 1328.
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
1111
2
3
4
5
6
7
8
9
11110
11
12
13
14
15
16
17
18
19
11120
21
22
23
24
25
26
27
28
29
11130
31
32
33
34
35
36
37
38
39
11140
41
42
43
11144
Folio 270
Review of International Political Economy 13:5 December 2006: 750771
Towards a conceptual framework for
regionalisation: Bridging new regionalism
and integration theory
Alex Warleigh-Lack
Department of Politics and History, School of Social Sciences,
Brunel University, Uxbridge, UK
ABSTRACT
This paper argues that the divide between new and old regionalisms in
international politics is increasingly seen as exaggerated, but that the con-
ceptual implications of this non-difference have yet to be taken seriously. The
attempt to build a newbody of theory to explain and describe recent forms of
region-buildingthe New Regionalist Approachis mistaken, and falsely
sets up classical integration theory as an Other in an act of auto-denition.
Likewise, the acceptance of this divide by EUscholarswhether explicitly or
by defaulthampers their own attempts to elaborate useful theory. The two
areas of study are properly understood not as separate paradigms, but rather
as sub-divisions of the same one. Thus, afruitful waytoharness the insights of
scholars in both sub-elds of study is to undertake an explicit programme of
comparative research based around an agreed set of independent variables,
research issues and hypotheses, all stemming from a common denition of
the dependent variable. The paper sets out a denition and typology of this
dependent variableregionalisationand argues for a reexive approach
to the elaboration of a conceptual framework for its study. The paper n-
ishes with a discussion of suitable independent variables and four tentative
hypotheses to be explored in empirical research.
KEYWORDS
New regionalism; integration theory; regionalisation.
1. INTRODUCTION: REGIONALISMS OLD AND NEW
AND THE PROBLEM OF THEORY
Theorising regionalismhas never been straightforward. The well-worn di-
alectic between neofunctionalismandintergovernmentalismin EUstudies
Review of International Political Economy
ISSN 0969-2290 print/ISSN 1466-4526 online
C
2006 Taylor & Francis
http://www.tandf.co.uk
DOI: 10.1080/09692290600950639
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
ultimately failed to generate workable theories, and scholars in this eld
historically the prime example of regional integration
1
studiesnow nd
themselves working with a mosaic (Diez and Wiener, 2004) of various
concepts, approaches and projects in a period of revision and experimen-
tation. On the other hand, scholars of the so-called new regionalism
in terms of quantity, primarily an extra-European phenomenon, but one
whichincludes andwas eveninitiatedby the relance of the EuropeanUnion
(Fawcett, 1995: 9; Schulz et al., 2001: 3)have generally eschewed ortho-
dox integration theory as represented by the acquis in EU studies. Instead
many such scholars have sought to generate their own corpus of theory
on the ground that their dependent variablenewregionalismwas too
different from the old regionalism of the pre-Single European Act EU
meaningfully to be studied using conceptual lenses ground by EU studies
scholars.
2
Thus, many of these scholars have sought to elaborate a self-
consciously separate new regionalism approach (NRA), an excellent crit-
ical overviewof whichis representedbythe essays inS oderbaumandShaw
(2003).
Nonetheless, scholars have begun to question this intellectual sepa-
ratism, and there is a growing body of work which disputes the idea of a
neat or even workable distinction between the two elds (Warleigh, 2004:
3048). Current thinking is that scholars in both sub-elds have much to
gain froma pooling of resources and the undertaking of explicitly compar-
ative studies: witness the plea made by the chief proponent of the NRA,
Bj orn Hettne (2003). Such cooperation wouldalso help reorient work in EU
studies away fromwhat has become a rather worthy-but-dull focus on the
middle range, in which the ultimate goal of the middle-range theorythe
generation of a holistic understandingappears to have been forgotten.
Furthermore, it would liberate EU studies from its untenable sui generis
assumptions andenable a newstrandof worktobe undertakenthroughthe
use of a different range of comparators fromthose most often employed
other regional integrationprojects, rather thanfederal polities of the nation-
state kind.
However, the theoretical implications of such a step have not yet been
fully addressed by scholars in either sub-eld: the need for comparative
studies is increasinglyaccepted, but a coherent means of carryingthis work
out has yet to be brought forward. This is perhaps no surprise, because it
requires the bridging of two gaps: that betweenold andnew regionalism
studies, and that between integration theory and the NRA. In this paper
I argue that in order to achieve this objective, both NRA and EU studies
scholars must admit that they are all essentially interested in the same
phenomenon, focus on agreeing a workable denition of the phenomenon
they study, and cooperate in joint research endeavours which explore a
commonlist of independent variables inorder to test hypotheses andmove
towards a new theoretical framework.
751
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
The structure of the paper is as follows. Section 2 explores in more depth
the weaknesses of existing theory in the eld(s). Section 3 discusses the
metatheoretical issues inherent in trying to form a new corpus of theory
fromtwoelds of scholarshipwhichauto-deneas discreteentities. Section
4 sets out a putative understandingof the dependent variable of integration
studies across the NRA-EU studies divide, which I call regionalisation.
Finally, Section 5 discusses the independent variables to be investigated in
order to advance the project and sets out tentative hypotheses to be put to
the test in future comparative empirical work.
2. THEORISING REGIONALISM/ REGIONAL
INTEGRATION: OVERCOMING THE CONCEPTUAL
DIVIDE
The problems of orthodox integration theory are well-documented and
need not be rehearsed here.
3
What counts in this context is the impor-
tance or otherwise of the differences that scholars of the new regionalism
perceived between their subject of study and that of the classic regional
integration literature, and in particular its most advanced theorisation, ne-
ofunctionalism. In this section of the paper I, therefore, set out the principal
differences between newregionalism and regional integration as set out
by scholars of the former and proceed to argue that the theoretical salience
of these differences is far less than has generally been assumed. This is
for four main reasons. First, because the claimed differences between new
regionalism and its antecedents are, to some extent, exaggerated. Second,
because EU scholars themselves no longer tend to use neofunctionalism
and its attendant ontologies/epistemologies so widelythus, the theoret-
ical basis for the claim that regionalism in Europe and elsewhere cannot
be studied in the same way is metatheoretically and methodologically un-
sound. Third, because the fact that the EU has itself been just as much
a form of new regionalism as NAFTA, APEC, etc. tends to be acknowl-
edged, but glossed over, by scholars in both elds. And nally, because
the new regionalism approach is itself being revised, and several of the
grounds on which it set itself apart from previous bodies of theory are
being questioned.
Questioning the New regionalism
For many scholars in the eld, new regionalism can be differentiated from
its predecessor in several ways.
4
AndrewHurrell (1995a: 332) lists ve ma-
jor distinguishing factors. First, NRis very diverse inits nature, comprising
a range of models/structures/processes of region-building rather than the
single norm expected of, and advocated for, rst wave regionalism by ne-
ofunctionalists. Second, it can involve partnerships between states in the
752
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
North andSouth (i.e. developedanddevelopingcountries, respectively),
whereas previous regionalisms presupposed only NorthNorth or South
South cooperation. Third, NR varies enormously in the level of institu-
tionalisation of the various regions, whereas old regionalism had a very
formal understanding of region-building that saw a lack of new joint in-
stitutions as a sign of weakness. Fourth, NR is multi-dimensional, and
fundamentally blurs the distinction between the economic and the politi-
cal, in contrast with its predecessor. Fifth, NR reects, shapes and requires
the development of a regional sense of identity, whereas rst wave region-
alism, as represented by its European variant, notoriously underplayed
and misunderstood issues of legitimacy, identity and popular support.
To this list should be added other factors. Hettne (2000: xxi) argues that
new regionalism is not dependent on spillover for its survival or success,
as instead the policy objectives of the region are set out explicitly at the
outset. Further core features claimed for new regionalism are that unlike
its predecessor(s) it is both global in scope (rather than effectively limited
to Europe), based on economic open-ness/neoliberalism rather than pro-
tectionism, independent of superpower politics, and shaped voluntarily
by actors from the bottom-up rather than imposed by foreign powers or
cultivated by actors at the new centre (on these various points see Hettne,
2002; S oderbaum, 2003).
How accurate is this picture of difference? Of Hurrells ve distinguish-
ing features, only the second and the fth (respectively, the NorthSouth
element of new regionalism and the lack of emphasis on issues of iden-
tity and legitimacy in the old version) seem to stand up to reection. It
is true that neofunctionalists, the pre-eminent scholars of rst-wave re-
gionalism, saw the lack of institutionalisation as a sign of a regional or-
ganisations likely failure to prosper (points 1 and 3), but that is entirely
different from assuming that the rst wave of regionalism resulted from a
single design; neofunctionalism may in this regard be narrowly prescrip-
tive, but if so that is a point about that particular theory rather than about
the nature of old regionalism (which was undertaken in diverse ways
in Latin America, Europe, Africa and Asia). Point 4the allegation that
old regionalism was not multi-dimensional and separated economics and
politicsis similarly misconceived. Just by taking the EU case it can be
seen that a broad range of tasks was anticipated in the very idea of the
Community Method (Coombes, 1970) of integration, whereby coopera-
tion in coal and steel production was intended to spill over into other
elds of policyand to a signicant extent did so even before the Single
European Act, as is evidenced by the extent of legal integration during the
1960s and 1970s as well as extent of EECcompetence fromthe outset of Eu-
ropean integration in areas such as agricultural policy. By the same token,
the mixture of economics and politics in old regionalism has always been
a matter of controversy; the EU began as a matter of high politics (peace
753
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
preservation and economic recovery), and many of its controversies and
legitimacy problems have resultedfromits leaders attempts to pass highly
political measures off as matters of economics and trade (Warleigh, 2003:
Chapter 2).
Similar caution should be displayed in addressing the issues raised, re-
spectively, by Hettne and S oderbaum. It is true that old regionalism de-
pended on the cultivation of spillover by actors at the newcentral level (as
well as interest groups) for its success, and under-estimated the ability and
will of national governments to resist this pressure. The stress on spillover
cultivation is clear from both the memoirs of key political actors (Monnet,
1978) and neofunctionalist theory (Haas, 1958, 1964). On that head, newre-
gionalism is clearly different. It is also valid to point out that economically
speaking, newregionalism is neoliberal in nature, reecting the changing
fashions and ideologies of the times. However, it is at least questionable
whether old regionalism(as represented by both neofunctionalismand EU
politics in the pre-Single Act era) really failed to focus on social actors role
in the process of region-building. As pointed out earlier, interest groups
were considered by neofunctionalists to be likely to play a key part in the
process; and empirical evidence shows that, although the Single Act cer-
tainly caused a urry of interest group activity at EU level, this was by no
means absent beforehand (Greenwood, 1997).
Whether new issues can or cannot be added to the remit of a new re-
gional organisation once it has been set up must remain an open question,
given the youth of the various new regional integration projects. Equally
it is simply incorrect that old regionalism was (usually) involuntary,
whereas new regionalism is freely chosen. Regional integration was
classically dened by neofunctionalists as a voluntary process, in order to
distinguish it fromprevious methods of unifying territories such as nation-
building or empire (Haas, 1970). It might be argued that neofunctionalists
under-played the role of US dominance in supporting/dictating regional
integration in Europe; but then, US involvement in NAFTA (Hurrell,
1995b) and APEC (Foot, 1995) has been crucial in determining the policies
towards regionalism of the two organisations respective member states.
Perhaps it might be argued that the Community Method of European
integration sought a system-shaping, and even system-building, role for
the European Commission. However, it is conventional wisdom that the
Commissions ability to play this role has been severely truncated, and
certainly has never amounted to a power to dictate the pace of EU politics
without a broad coalition of member state and interest group support (for
an overview, see Cini, 2002).
Thus, a certain degree of caution is necessary when attempting to make
distinctions between regionalisms old and new. Hettne (2003: 245) argues
that the theoretically salient differences between newregionalism and its
antecedent are in fact very few, and relate principally to the need to focus
754
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
analytically on a broad range of actors, to study both non-institutional
and institutional factors in the region-building process, to refer specif-
ically to globalisation and the global political economy as exogenous
factors having an impact on the regional organisation/process, and to
adopt a multi-disciplinary, multi-dimensional focus. These requirements
for theory-building are helpful, and are addressed in Section 5.
Old regionalism studies beyond neofunctionalism
A further ground on which the distinction between the NRA and theo-
ries of integration/old regionalism can be questioned is the caricature of
theory-building in the latter that is often to be found in NRAtheory. (Euro-
pean) integration theory has witnessed an explosion of new concepts and
approaches in recent years. The attempt to synthesise neofunctionalism
and intergovernmentalism in the early 1990s was unsuccessful (Warleigh,
1998), and although certain scholars have reclaimed both theories (on neo-
functionalism, see Schmitter, 2004; on intergovernmentalism, see Moravc-
sik, 1999), integration theory is no longer within the narrowconnes of the
debates of the 19501970s. Thus, the very processes which sparked the cre-
ationof the NRAsparkedconceptual renewal inintegrationtheorytoo. The
current focus is on middle-range theory, with the general rationalists ver-
sus constructivists debate ininternational relations becoming something of
a neworthodoxy (see Wiener and Diez, 2004, for an overview). Here is not
the place to comment on the strengths and weaknesses of the various new
approaches; what counts in the present analysis is the fact that integration
theory is as different today fromneofunctionalistintergovernmentalist or-
thodoxy of yore as the NRA itselfand arguably more diverse.
Taking the EU as new regionalism seriously
Moreover, it is necessary to take seriously the fact that the EU (the prime
case study of old regionalism) itself is part of the new regionalism. As
mentioned earlier, it was in the EU that the shoots of the new regionalism
rst broke the soil; and in its continuing experimentation with a range of
policy styles and regimes the EU gives as good an example of network
governance dependent on links to the global political economy as well as
the constituent units (the member states) as any. This fact has, however, not
been given theoretical centrality in new regionalism studies. Instead, NR
scholars have tended to emphasise the differences between regionalisms
old and new, and also been extremely wary of the idea that the European
experience might be treated as a template to follow slavishly elsewhere
(Acharya, 2002; Hettne, 2002). In their turn, old regionalism scholars (at
least, those concernedwithEUstudies) have tendedto ignore boththe new
regionalismand the NRAin their own theoretical endeavours.
5
Of course,
certainscholars inEUstudies have engagedwithnewregionalismtogive
755
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
but three examples, Ben Rosamond, Walter Mattli and Mario Tel ` o have all
producedinterestingworkinthis eld(Breslinet al., 2002; Mattli, 1999; Tel ` o,
2001)but these scholars remain fewin number. Explicit newregionalist
readings of the EU are few (for an exception, see Wunderlich, 2004). It
therefore remains to give proper weight to the EUs new regionalism
characteristics, a shortcoming from which scholars in both new and old
regionalisms suffer (Warleigh, 2004: 3049).
Revising new regionalism
A fourth and nal reason to overcome the false divide between new and
old regionalism studies is the fact that the New Regionalism Approach
has entered an explicit revision phase. Bj orn Hettne, the NRAs chief pro-
ponent, has in recent work undertaken reexive analysis of the NRA and
called for change (Hettne, 2003). In particular, Hettne argues in this piece
that the NRA exaggerated the differences between rst and second wave
regionalisms, over-stated the dependence of regional projects on global-
isation, and misjudged the growth potential of new regionalism. Other
scholars in the eld have made similar pleas for more and better work in
regional theory (Laursen, 2003a,b; S oderbaum, 2003: 2). Comparative anal-
yses of different regional integrationprojects are singledout as a useful way
forward (Hettne, 2001: 1; Higgott, 1998; Katzenstein, 1996). This reexive
phase of development in the NRA sits extremely well with the normative
turn and metatheoretical phase in EU studies (Bellamy and Castiglione,
2003; Warleigh, 2003: 1623), providing an opportunity for collaboration
in theory-building which ought not to be missed.
3. THEORY- BUILDING ACROSS PARADIGMS?
TOWARDS A CONCEPTUAL FRAMEWORK
However, is such collaboration possible? Certainly, the auto-denition of
the new regionalism as a separate eld of study should give scholars
pause; the intellectual parochialism of much theory work in EU studies
should do the same. One of the key concepts in social science theory is that
of the paradigm (Kuhn, 1970)a body of thought adopted as a matter of
faith(Kuhn, 1970: 156) whichallows us tomake sense of the world/our cho-
sen phenomena for study, and which must be accepted or rejected whole-
sale (Doyal and Harris, 1989: 14). Only internal critique of a paradigm is
possible, for outside criticism is easily written off on the ground that it
starts froma false basis or fails to understandthe subtleties of the paradigm
under examination. If we interpret integration theory andthe NRAas dif-
ferent paradigms, then there must be signicant doubt about the feasibility
of the collaboration between scholars in the two sub-elds called for im-
mediately above.
6
756
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
However, and following from Section 2 earlier, I maintain that the NRA
and integration theory are not separate paradigms, but rather sub-elds
of the same one. Although they often use different terminology, both sets
of scholars study the same dependent variable: the formation of regional
blocs, processes andclusters inthe global political economy. Theybothstart
from political science perspectives to embrace inter-disciplinarity and to
focus on the functions, scope, development and impact of regionalisation.
7
They are not reections of different meta-understandings of international
relations (Idealism and Realism);
8
instead, within each eld, scholars who
might be calledidealists or realists contribute to the debate. Such paradigm
sub-sections as the NRAandintegrationtheoryare thus not accuratelycon-
ceived as incommensurable rivals. This is partly because debate between
paradigms is always circular and inconclusive, meaning that they cannot
compete in any meaningful sense of the word and thus to speak of ri-
val paradigms is always problematic (Kuhn, 1970); however, it is chiey
because the alleged differences between the two sub-elds of study are
revealed upon hard analysis to be meagre, and therefore capable of delib-
eration, adaptation and expression in a new shared understanding.
Nonetheless, sub-paradigms can and do proceed as if the other did not
exist, either considering themselves as true paradigms or in real or af-
fected ignorance of each other. It is this problem which must be addressed
if the various useful insights generated by both sets of scholars are to
be harnessed with optimal benet. This requires explicit attention to the
strengths and weaknesses of each approach and dialogue between their
respective proponents.
9
Each sub-eld will gain from this.
10
New region-
alism scholars would thereby embrace a more complex understanding
of interdisciplinarity (law, sociology, anthropology as well as politics and
economics), broaden their focus and range by no longer seeing the EU
as the Other, and learn from the various mistakes that integration the-
orists/EU studies scholars have made as well as the insights they have
generated. Old regionalism scholars would rediscover the importance of
critical theory and political economy, both of which are under-represented
in EUstudies, and engage more explicitly with global/international issues
that affect their dependent variable. Both sets of scholars would gain from
explicit investigation of what may not after all be quirks of the EU sys-
tem as it advances (e.g., exibility, heavy reliance upon informal politics,
legitimacy issues, complex inter-linkages between the new centre and the
component states) but rather inherent features of regionalism wherever
practiced.
How is this process of engagement to be undertaken, however? What
kind of approach to theory-building does it require? Two initial points are
obvious, but also important: rst, if we undertake this task we are not start-
ing in a vacuum; we therefore needto take stock of what we already know
or claim, and use the resultant audit as a starting point. Second, progress
757
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
will come gradually through dialogue, comparative research around a
shared research agenda, and critique. The present article is intended as
a rst reexive step in this direction.
4. DEFINING THE DEPENDENT VARIABLE:
REGIONALISATION AS AN OFFER
Trying to dene what a region is has been fraught with difculty in the
NRA. Do regions have to be (heavily) institutionalised? Do they have to be
geographically distinct and coherent? Do they have to be at a certain stage
of economic development before they qualify for the label? Calleya (1997:
34) argues that there is no agreement in the literature on this head, arguing
that regions are de facto dened by the interactions (social/cultural ows)
that they contain.
11
Typologies of regions abound; they can be transna-
tional (network-based, led by cross-border interest groups and informal
interaction), intergovernmental (ledby governments) or comprehensive
(led by both governments and interest groups) (Calleya, 1997: 38). They
can be core or periphery regions (Hettne, 2000: xviixix). They can be
hegemonic (dominated by one state), international (where all compo-
nent states are roughly equal), or transnational (of which there are two
sub-categories: corporate transnational regions, which seek to promote eco-
nomic growth, andsocietal transnational regions, which seek to tackle wealth
inequalities) (Hveem, 2003: 8691). Moreover, regions can uctuate along
a continuum comprising ve stages of region-ness according inter alia
to internal ows of senses of regional identity and global level variables
(Hettne, 2002; Hettne and S oderbaum, 2002).
12
There is thus an emergent
view that attempting a narrow denition of the term region is not likely
to be productive, and that instead theorists should concentrate on under-
standing the various processes of regionalisation that are unfurling across
the globe (Laursen, 2003b; Schulz et al., 2001).
That said, good theory-building requires clarity about the nature of the
dependent variable. To that end, I propose the term regionalisation as
one which could be usefully adopted, and offer a typology to help under-
stand and conceptually manage the diversity of this phenomenon. I intend
regionalisation to mean:
an explicit, but not necessarily formally institutionalised, process of
adapting participant state norms, policy making processes, policy
styles, policycontent, political opportunitystructures, economies and
identity (potentially at both elite and popular levels) to both align
with and shape a new collective set of priorities, norms and interests
at regional level, whichmayitself thenevolve, dissolve or reachstasis.
Regionalisation focuses by denition on process rather than outcome;
this helps avoid unnecessary battles over dening the likely or desired
758
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
end-point, since there may in fact be no such thing. By the same token,
no particular end-point for, or institutional conguration of, regionalisa-
tion is prioritised. In this way, teleological assumptions such as those of
early neofunctionalists can be avoided. Moreover, the term can be applied
to processes of region-construction which have diverse natures and core
rationales. Table 1 gives a typology of regionalisation.
Regionalisation is a dynamic term, implying uidity and movement.
However, it is not intended to imply that processes of regionalisation
can, or should, only progress/deepen. Moreover, the term connotes a
non-monolithic and multi-level focus, because it brings the scholars at-
tention to transformations of structures, process and agency at the re-
gional level, the level of the component states, and within those states
(groups, institutions, individuals): one cannot make or recast a regionwith-
out altering its component parts and the individual people swept up in,
or partly causing, the process. Additionally, regionalisation should be
understood as a two-way, or multi-way, process in which complex con-
stellations of variables at regional, global, national, local, and even per-
sonal/individual levels can combine to produce outcomes at any given
time.
Thus, the term is generalisable, by which I mean that it could be ap-
plied to any instance of cross-border international region-formation in
world politics. It expects a link between politics and economics, but does
not privilege one over the other. It allows for security issues to be a
causal factor, but does not expect this always to be the case, at least if
by security we mean military issues. It allows for both normative and
more instrumental factors to play a causal role, again without stating
which is the more important. Such matters should be explored empiri-
cally rather than simply stated at the outset. As a nal benet, it avoids
loaded terminology such as old regionalism, new regionalism, and in-
tegration (which NRA scholars, with some justication, see as an irre-
trievably neofunctionalist term, and thus too closely bound to teleological
accounts of regional polity-formation for general useviz. S oderbaum,
2003).
Understanding regionalisation as the dependent variable in such a way
thus has much to offer. It might also be seen to have shortcomings: it does
not specify the policy areas in which regionalisation must/shouldoccur, or
set out precise mechanisms by which the process might be deepened. Nor
does it say why states might undertake regionalisation in the rst place,
or even whether the choice is actually theirs to make. Nor does it specify
precisely the range of actors involved and their roles in the process; instead
it lists actors who are potentially involved. All these problems are, however,
capable of solution by comparative empirical research. In the next section
of the paper, I set out and justify a list of independent variables to study in
such a manner, and to such an end.
759
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
T
a
b
l
e
1
A
t
y
p
o
l
o
g
y
o
f
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
T
y
p
e
o
f
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
F
e
a
t
u
r
e
s
E
x
a
m
p
l
e
s
S
t
r
u
c
t
u
r
e
d
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
A
c
o
m
p
l
e
x
m
u
l
t
i
-
i
s
s
u
e
e
n
t
i
t
y
,
u
s
i
n
g
i
n
f
o
r
m
a
l
p
o
l
i
t
i
c
s
d
e
s
p
i
t
e
d
e
e
p
i
n
s
t
i
t
u
t
i
o
n
a
l
i
s
a
t
i
o
n
.
N
o
h
e
g
e
m
o
n
e
x
i
s
t
s
;
s
u
b
s
t
a
n
t
i
a
l
p
o
w
e
r
i
s
d
e
l
e
g
a
t
e
d
t
o
t
h
e
n
e
w
c
e
n
t
r
e
i
n
m
a
n
y
p
o
l
i
c
y
a
r
e
a
s
,
a
n
d
i
s
c
o
s
t
l
y
t
o

r
e
p
a
t
r
i
a
t
e

.
E
u
r
o
p
e
a
n
U
n
i
o
n
(
E
U
)
;
A
f
r
i
c
a
n
U
n
i
o
n
(
i
n
a
s
p
i
r
a
t
i
o
n
)
D
o
m
i
n
a
n
c
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
A
n
a
l
t
e
r
n
a
t
i
v
e
t
o
a
g
l
o
b
a
l
r
e
g
i
m
e
,
e
s
t
a
b
l
i
s
h
e
d
b
y
r
e
g
i
o
n
a
l
/
g
l
o
b
a
l
h
e
g
e
m
o
n
t
o
c
o
u
n
t
e
r
t
h
r
e
a
t
s
t
o
i
t
s
p
o
w
e
r
f
r
o
m
o
t
h
e
r
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
e
s
o
r
s
t
a
t
e
s
.
F
o
c
u
s
e
s
o
n
n
a
r
r
o
w
r
a
n
g
e
o
f
i
s
s
u
e
s
,
w
i
t
h
e
m
p
h
a
s
i
s
o
n
t
r
a
d
e
.
N
o
r
t
h
A
m
e
r
i
c
a
n
F
r
e
e
T
r
a
d
e
A
r
e
a
(
N
A
F
T
A
)
S
e
c
u
r
i
t
y
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
F
o
c
u
s
o
n
s
e
c
u
r
i
t
y
i
s
s
u
e
s
,
e
i
t
h
e
r
m
i
l
i
t
a
r
y
o
r
s
o
c
i
o
-
e
c
o
n
o
m
i
c
.
M
a
y
b
e
g
e
o
g
r
a
p
h
i
c
a
l
l
y
c
o
n
t
i
g
u
o
u
s
o
r
t
r
a
n
s
r
e
g
i
o
n
a
l
i
n
m
e
m
b
e
r
s
h
i
p
.
E
u
r
o
-
M
e
d
i
t
e
r
r
a
n
e
a
n
P
a
r
t
n
e
r
s
h
i
p
;
N
o
r
t
h
A
t
l
a
n
t
i
c
T
r
e
a
t
y
O
r
g
a
n
i
s
a
t
i
o
n
(
N
A
T
O
)
N
e
t
w
o
r
k
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
R
e
g
i
o
n
a
l
i
d
e
n
t
i
t
y
-
d
r
i
v
e
n
r
e
s
p
o
n
s
e
t
o
g
l
o
b
a
l
i
s
a
t
i
o
n
.
M
a
y
a
c
q
u
i
r
e
s
i
g
n
i

c
a
n
t
o
r
m
o
r
e
l
i
m
i
t
e
d
r
a
n
g
e
o
f
p
o
w
e
r
s
,
b
u
t
r
e
l
i
e
s
p
r
i
m
a
r
i
l
y
o
n
n
o
n
-
i
n
s
t
i
t
u
t
i
o
n
a
l
i
s
e
d
o
r
i
n
t
e
r
g
o
v
e
r
n
m
e
n
t
a
l
w
o
r
k
i
n
g
m
e
t
h
o
d
s
.
A
s
s
o
c
i
a
t
i
o
n
o
f
S
o
u
t
h
e
a
s
t
A
s
i
a
n
N
a
t
i
o
n
s
(
A
S
E
A
N
)
;
A
f
r
i
c
a
n
U
n
i
o
n
(
i
n
a
c
t
u
a
l
i
t
y
)
;
S
o
u
t
h
A
m
e
r
i
c
a
n
C
o
m
m
o
n
M
a
r
k
e
t
(
M
e
r
c
o
s
u
r
)
C
o
n
j
o
i
n
e
d
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
S
t
r
a
t
e
g
i
c
p
a
r
t
n
e
r
s
h
i
p
o
f
o
n
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
w
i
t
h
e
i
t
h
e
r
a
n
o
t
h
e
r
s
u
c
h
p
r
o
c
e
s
s
o
r
w
i
t
h
k
e
y
s
t
a
t
e
s
o
u
t
s
i
d
e
t
h
e
r
e
g
i
o
n
,
f
o
r
t
h
e
s
a
k
e
o
f
e
c
o
n
o
m
i
c
o
r
f
o
r
e
i
g
n
p
o
l
i
c
y
a
d
v
a
n
t
a
g
e
A
s
i
a
-
P
a
c
i

c
E
c
o
n
o
m
i
c
C
o
o
p
e
r
a
t
i
o
n
(
A
P
E
C
)
;
p
u
t
a
t
i
v
e
F
r
e
e
T
r
a
d
e
A
r
e
a
o
f
t
h
e
A
m
e
r
i
c
a
s
760
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
5. INDEPENDENT VARIABLES OF REGIONALISATION
AND ISSUES FOR RESEARCH
Ernst Haas (1970: 6146) argued that regional integration projects (his ter-
minology) depended on certain key factors for their success: transaction
levels betweenparticipant states hadto increase relative to those withthird
countries, in order to increase actor perceptions of interdependence; all in-
volvedactors/states hadtoperceive benets fromthe process, evenif those
benets were distributed unequally; the readiness of wealthier participant
states to provide side-payments when necessary was more important for
success than relative homogeneity of either wealth or size between par-
ticipant states; formal institution-building helped cement senses of inter-
dependence; and although certain issue areas may always be resistant to
regionalisation, and others may reach a plateau at an early stage of the
process, the key catalyst was the creation of a common market for and
between the component states. This set of variables, generated on the back
of impressive empirical work, is nonetheless clearly neofunctionalist: wit-
ness for example the emphasis on institutions, the perceived importance of
progress/deepening, the idea of protectionist market-formation. Thus, it
should be treated with as much caution as respect in regionalisation stud-
ies, even if we recall (again) that the so-called new regionalism began
with the very act of protectionist market-creation in what is now the EU
that Haas identied as key.
More recent literature suggests arange of independent variables tostudy.
Hveem (2003) argues that perceptions of output legitimacy are crucial for
regionalisation to continue or progress; B as et al. (2003) urge scholars to
focus explicitly on the interplay between formal and informal aspects of
regionalisation.
Walter Mattli (1999: 42) suggests that if we wish to understand the likely
success of a regionalisation process (although like Haas he uses the term
regional integration), we should focus on four key variables: the likeli-
hood of signicant economic gain; likely gain for key national actors, e.g.
increased legitimacy/popularity; the existence of credible and accepted
leadership; and joint formal institutions (although Mattli argues that these
are helpful rather thanvital). Inlater work(Mattli, 2003), he alsoargues that
horizontal factorsessentially the willingness of the component states or
regional organisation to delegate power to the private sectorare vital for
successful economic regionalisation, and therefore need to be studied as
key variables.
Finn Laursen (2003b) argues that comparative study of regionalisation
(my term) projects should focus on four key variables: the functional scope
of the various entities; their respective institutional systems; the size of
their membership; and their respective impacts. The level of regionalisa-
tion (how much economic regionalisation? Political as well as economic
761
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
regionalisation?) can be understood by exploring three issues: the interests
of the component states; the roles and capacities of regional institutions;
and the impact of exogenous factors, e.g. globalisation. Breslin et al. (2002:
19) agree with Laursens rst and third issues, but add a different comple-
mentary variablethe existence of a sense of regional identity. All these
lists of variables provide useful points of departure, but they require har-
nessing in a consolidated format and attention both to contradictions and
to hidden(rather thanexplicitly articulated) assumptions of a neofunction-
alist or NRA kind. The following is an attempt to do just that, while also
adding variables (or issues to explore in order to assign the proper weight
to those variables).
Before presenting the list of independent variables, however, it may be
worth clarifying the reasons why the framework remains within the polit-
ical economy approach. First, and most basically, the fact is that most work
in the eld derives frompolitical economy, whether we date its origin with
neofunctionalism(Haas, 1958) or with the NRA(on the crucial role of criti-
cal political economy inthe NRA, see Schulz et al., 2001). Second, this politi-
cal economy approach is exible, andcan be taken fromboth constructivist
perspectives (Hettne, 2003), and rationalist perspectives (Mansled and
Milner, 1999), thereby facilitating pluralismand enabling critical dialogue.
Third, international political economy seeks to establish the relationship
between the global and the regional levels of governance/economics, and
sees regional and global levels as potentially reinforcing rather than nec-
essarily in rivalry (Hettne, n.d.). This enables us to locate each region that
we study in a broader global context while paying attention to the roles
each region may play in the development of globalisation or the global
polity. Finally, the critical schools of thought within international politi-
cal economy enable scholars to ask searching questions about structural
power and vested interests in the international/global system, allowing
us to determine the extent to which regional organisations are, or may be,
tools of hegemonic power.
There are, I submit, four principal independent variables which require
exploration. All of them have sub-variables, or perhaps better expressed,
issues to address empirically in order to generate an understanding of the
variable in question. The principal independent variables are: the rationale
for the beginning of the regionalisation process (genesis); the way the re-
gionalisationprocess works (functionality); the ideational/affective factors
at work in the process (socialisation); and the effects of regionalisation on
its component states/other states (impact). Table 2 lists each principal in-
dependent variable in turn, and then sets out issues for empirical research
in order to explore them.
The rst independent variable, Genesis, seeks to explore why a given
process of regionalisation was initiated. It asks why states joined the pro-
cess and continue to participate in it, and explores existential issues such
762
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
T
a
b
l
e
2
I
n
d
e
p
e
n
d
e
n
t
v
a
r
i
a
b
l
e
s
o
f
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
G
e
n
e
s
i
s
F
u
n
c
t
i
o
n
a
l
i
t
y
S
o
c
i
a
l
i
s
a
t
i
o
n
I
m
p
a
c
t
W
h
y
d
o
s
t
a
t
e
s
p
a
r
t
i
c
i
p
a
t
e
?
W
h
o
l
e
a
d
s
,
h
o
w
a
n
d
w
h
y
?
I
m
p
a
c
t
o
n
s
e
n
s
e
s
o
f
i
d
e
n
t
i
t
y
(
a
t
e
l
i
t
e
a
n
d
m
a
s
s
l
e
v
e
l
s
)
O
n
g
l
o
b
a
l
e
c
o
n
o
m
y
W
h
y
d
o
s
t
a
t
e
s
c
o
n
t
i
n
u
e
a
s
p
a
r
t
i
c
i
p
a
n
t
s
?
W
h
o
m
a
k
e
s
d
a
y
-
t
o
-
d
a
y
d
e
c
i
s
i
o
n
s
?
W
i
t
h
w
h
i
c
h
d
e
c
i
s
i
o
n
r
u
l
e
s
?
T
r
a
n
s
a
c
t
i
o
n

o
w
s
(
s
o
c
i
a
l
,
c
u
l
t
u
r
a
l
,
e
c
o
n
o
m
i
c
)
O
n
d
e
m
o
c
r
a
c
y
i
n
t
h
e
c
o
m
p
o
n
e
n
t
s
t
a
t
e
s
W
h
a
t
a
r
e
t
h
e
s
t
a
t
e
d
p
u
r
p
o
s
e
a
n
d
o
b
j
e
c
t
i
v
e
s
o
f
t
h
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
?
W
h
a
t
r
o
l
e
,
i
f
a
n
y
,
i
s
p
l
a
y
e
d
b
y
n
o
n
-
s
t
a
t
e
a
c
t
o
r
s
?
P
o
p
u
l
a
r
a
w
a
r
e
n
e
s
s
a
n
d
u
n
d
e
r
s
t
a
n
d
i
n
g
O
n
d
i
s
t
r
i
b
u
t
i
o
n
o
f
w
e
a
l
t
h
(
s
t
a
t
e
-
s
t
a
t
e
,
a
n
d
i
n
t
r
a
-
s
t
a
t
e
)
H
o
w
i
s
t
h
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
d
e

n
e
d
(
i
n
c
l
u
s
i
o
n
/
e
x
c
l
u
s
i
o
n
)
?
W
h
i
c
h
p
o
l
i
c
y
i
s
s
u
e
s
a
r
e
a
d
d
r
e
s
s
e
d
,
a
n
d
w
h
y
?
D
o
e
s
t
h
i
s
b
a
l
a
n
c
e
c
h
a
n
g
e
o
v
e
r
t
i
m
e
?
P
o
p
u
l
a
r
s
u
p
p
o
r
t
(
l
e
g
i
t
i
m
a
c
y
)
O
n
i
n

u
e
n
c
e
o
f
t
h
e
c
o
m
p
o
n
e
n
t
s
t
a
t
e
s
(
b
o
t
h
o
n
e
a
c
h
o
t
h
e
r
a
n
d
v
i
s
-
`a
-
v
i
s
t
h
i
r
d
c
o
u
n
t
r
i
e
s
)
I
s
t
h
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
s
t
o
p
-
g
o
,
l
i
n
e
a
r
,
r
e
v
e
r
s
i
b
l
e
,
o
r
s
t
a
t
i
c
?
I
n
c
r
e
a
s
e
i
n
t
r
u
s
t
(
e
l
i
t
e
;
m
a
s
s
)
?
A
r
e
c
e
r
t
a
i
n
p
o
l
i
c
y
s
t
y
l
e
s
/
t
y
p
e
s
i
m
p
o
s
e
d
o
r
m
a
d
e
i
m
p
o
s
s
i
b
l
e
?
I
s
t
h
e
r
e
a
n
y
p
o
l
i
c
y
l
e
a
r
n
i
n
g
(
e
x
c
h
a
n
g
e
o
f
m
o
d
e
l
s
/
i
d
e
a
s
,
o
r
c
o
n
v
e
r
g
e
n
c
e
t
o
n
e
w
n
o
r
m
?
)
D
o
t
h
e
a
c
t
o
r
s
i
n
v
o
l
v
e
d
a
l
s
o
c
o
l
l
a
b
o
r
a
t
e
o
u
t
s
i
d
e
t
h
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
?
I
f
s
o
,
h
o
w
a
n
d
w
h
y
?
A
r
e
t
h
e
s
t
r
u
c
t
u
r
e
s
/
c
o
n
s
t
i
t
u
t
i
o
n
s
o
f
t
h
e
c
o
m
p
o
n
e
n
t
s
t
a
t
e
s
c
h
a
n
g
e
d
?
W
h
a
t
m
i
x
t
u
r
e
o
f
i
n
f
o
r
m
a
l
a
n
d
f
o
r
m
a
l
m
e
c
h
a
n
i
s
m
s
?
D
o
e
s
t
h
e
r
e
g
i
o
n
a
l
i
s
a
t
i
o
n
p
r
o
c
e
s
s
t
a
k
e
o
n
m
o
r
e
s
t
a
t
e
s
o
v
e
r
t
i
m
e
?
I
m
p
l
e
m
e
n
t
a
t
i
o
n
a
n
d
e
n
f
o
r
c
e
m
e
n
t
m
e
c
h
a
n
i
s
m
s
P
e
r
f
o
r
m
a
n
c
e
(
o
u
t
p
u
t
)
763
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
as the objectives of the process and its internal identity (who is eligible to
participate, and why?). This variable will also allowscholars to explore the
diversity in purpose and teleology (if any) in contemporary regionalisa-
tion processes. Exploring this variable will allowscholars to develop more
rigorous understandings of the links between purpose, membership and
(internal) identity in regionalisation processes, and establish whether the
typology set out in Table 1 is tenable.
The second independent variable, Functionality investigates the work-
ings of the regionalisation process once it has been set in motion. It asks a
range of questions pertinent to determining the range of actors involved
in regional policy- or decision-making, and unpacking their relative inu-
ence. It therefore seeks to go beyonda state-centric focus (see also Solingen,
1997). Further issues studied under the heading of this independent vari-
able focus on the scope of the regionalisation processi.e. the range of
policy issues addressedand on the developmental process of the region.
Here, attention centres on whether there is, to use an EU studies term, any
deepening of the process in terms of the acquisition of greater powers by
the region, and if so/not why this has been the case. Further relevant is-
sues include the mechanisms by which decisions are made (formal versus
informal), and the kind of system that is developed at the regional level. Is
it intended to be exclusive (i.e. to rule out bi- or multi-lateral collaboration
between its members outside the regional process)? What capacity does
the system have to generate policy which is actually implemented, and
why? How well is the region seen to perform its key tasks? Analysing this
variable will enable scholars to understand how various kinds of region
operate, and establish whatever is generalisable both within each type of
region (as set out in Table 1) and across the entire typology. This will be
analytically valuable because it will allow scholars to determine whether
internal path dependencies or external factors such as globalisation or the
role of powerful non-regional actors (perhaps the US, or the WTO) have
the greater inuence on the evolution and output of a region.
Socialisation, the third independent variable, focuses on internal de-
velopments within the region, asking whether the latter has any impact on
the ideational and normative contexts of the various component states, at
both elite and mass levels. Does popular awareness of the process grow
over time, and if so does this increase popular support for the region? Do
levels of trust and senses of solidarity or mutuality develop? If so, is this
all the result of, or a cause of, increased transaction ows, or are other
causes to be found? In short, does the operation and continued existence
of the region have an impact on how citizens and elites in the component
states understand themselves, each other, their states, and their counter-
parts in other states in the region? Does it have an impact on their political
behaviour? Exploring this variable will enable scholars to establish the
link between identity and legitimacy in the various regional processes,
764
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
and draw conclusions about several issues. First, how important are iden-
tity and legitimacy in regionalisation, and does this vary according to
any clear pattern? Second, are certain kinds of region more likely to so-
cialise elites/the general populace than others? Third, is there any com-
monality between the normative/ideational justications for each entity
in the various types of region, and both within and between each type,
is there any evidence that this justication changes over time, i.e. after
the regions initial establishment? If so, why, and are there any common
patterns?
The nal independent variable, Impact, concentrates attention on the
outcomes of the region, whether permanent or ongoing. Here, attention
is paid to both external and internal impacts, with the focus on material
rather thanideational issues. Howhas the regionimpacteduponthe global
political economy, and why? How has it been viewed by third countries
have any such states sought to join the region, and with what success?
Have they sought to hamper the regions further development? Internally,
has the region shaped the state apparatus, policy style, and democratic
processes of the component states, and if so in which ways? Has this re-
sulted in any change in the relationship between the component states and
between groups of citizens inside each of them? Has there been a change
in the inuence of the component states on both each other (for example,
has a powerful state yielded some of its capacity for dominance, and if
so why?), and on third countries (crudely put, do they now punch above
their previous weight on issues of international or global politics, such as
WTO negotiations?) An appreciation of this variable will allow scholars
to establish whether an individual region is meeting its objectives, and
then generalise to both other regions of the same sort and ultimately to all
regions in order to establish whether certain kinds of region are more ef-
fective than others in the contemporary global political economy. This will
then allowboth scholars and practitioners to evaluate any region/regional
process, and suggest reform. In a sort of feedback loop, this could in prin-
ciple return attention to the type of region involved (should it change from
one type to another?), or to the second independent variable (how the
region works). Thus, there is a certain inter-linking between the four inter-
dependent variables, and they should be understood to be separated for
analytical purposes rather than because they are likely to be empirically
discrete.
The list of suggestedresearchissues for eachof the independent variables
appears to me to be comprehensive at the present time. However, nothing
precludes the addition of further questions should this prove necessary.
Table 3 gives a tentative hypothesis to guide the empirical research for
each of the independent variables.
The four hypotheses place the governments of the participating states in
the driving seat, postulating that each regional process is begun because
765
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
Table 3 Hypotheses
Independent variable Hypothesis
Genesis States participate in regionalisation because they perceive
a specic common interest in managing the economic
and/or security consequences of globalisation that is
not shared with states outside the region
Functionality Regionalisation is a stopgo process dominated by the
governments of component states and dictated by their
perceived interests, with a tendency towards informal
methods of decision-making
Socialisation Policy learning and joint problem-solving are more
apparent than regionalised identities at either elite or
mass level
Impact Regionalisation empowers the component states as a
collective vis-` a-vis third countries and has signicant
structural (constitutional) impact on its component
states
the component states perceive a shared major interest that is exclusive
to their number. However, the second-order interests of these states, i.e.
those of a more day-to-day kind, will tend to be divergent and this diver-
sity will preclude an easy progress along a pre-determined development
path. As a result, it appears logical to envisage greater potential in terms of
policy learning and/or joint problem-solving at elite level (both state and
non-state actors may be important here, however) than in the develop-
ment of a thick form of common regional identity. Here, the hypothesis
allows for a sense of identity to be a causal factor in the creation of a
region, but makes clear that the concrete expression of such an identity
thereafter is likely to be limited: for instance, Asian values make for good
rhetoric, but not (yet) for common ASEANcitizenship or nancial solidar-
ity/redistribution. Finallyandagainleadingbacktoearlier hypotheses
it is suggested that the impact of regionalisation is likely to be signicant
on both the component states and third countries. This hypothesis is ob-
viously open to falsication in many cases, but should be taken to infer
that a region that is internally perceived to be successful will leave neither
its component states nor third countries untouched, and as a result may
generate pressures for evaluation of its basic nature (independent variable
1) and workings (independent variable 2).
Each hypothesis is intended to involve as many of the relevant research
issues as possible, and is capable of being tested using research questions
formulated on the basis of the research issues listed earlier. Each of the
hypotheses is capable of partial or complete falsication, and can be stud-
ied from a range of perspectives (perhaps as test cases in the rationalist-
constructivist debate). By testing each of the hypotheses empirically, it
766
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
should therefore be possible to generate an holistic understanding of con-
temporary regionalisation processes, and thereby bridge the gaps between
old and new regionalism studies be they empirical or theoretical.
6. IN LIEU OF A CONCLUSIONSUMMARY AND
ASPIRATION
In this paper I have argued that the divide between new and old region-
alisms is conceptually untenable as well as unhelpful. The stated differ-
ences between new and old regionalisms as politico-economic projects
are exaggerated, and only two (the NorthSouth element of some new re-
gionalist projects such as NAFTA, and the relative lack of emphasis on
issues of identity and legitimacy in the old regionalist projects and schol-
arship) stand up to scrutiny. These two issues do not constitute justica-
tion for the creation of another sub-eld of social science. Furthermore, in
conceptual terms, scholars of the new regionalism often caricature clas-
sical integration theory; there are far fewer differences between current
theoretical work in the epitome of old regionalism, EU studies, and con-
ceptual work on the various other contemporary regionalisms than might
be thought from this misrepresentation. Equally, the fact that the New Re-
gionalism Approach has highlighted issues which could very usefully be
addressed in EU studies has gone largely unnoticed because scholars in
both sub-elds of study have tended to gloss over, or at least fail to give
adequate conceptual weight to, the fact that the present day EU itself is a
form, and even the crucible, of new regionalism. I argued that the divide
between new and old regionalism was therefore erroneous, and capable
of being understood as an unfortunate schism within a single paradigm
rather than as evidence of separate paradigms incapable of meaningful
communication between themselves.
In order to repair this divide, I elaborated a new understanding of the
dependent variable, the process by which states work together in regional
clusters, which I called regionalisation and which was deliberately de-
ned in terms that are a priori acceptable to scholars of both new and old
forms of regionalism (or at least to contemporary adherents of the NRA
and EU studies). This denition focuses on process rather than outcome,
and sets the basis for the stipulation of independent variables, issues to be
explored in research, and hypotheses for such work.
In sum, the paper argues for a reexive approach to the development of
a conceptual framework for the study and theorisation of regionalisation,
both in terms of the kind of theory that is being sought and in the ap-
proach taken to its elaboration. It must remain possible that such a frame-
work will reveal the difculties in studying the diverse regionalisms of the
contemporary world, and that, as with rst generation neofunctionalism,
real-world diversity may defeat the attempt at extensive analytical scope.
767
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
Should this prove the case, however, the framework suggested here would
serve its purpose in pointing the way for future research by indicating
the limits as well as the potential of a single conceptual framework of re-
gionalisation. Moreover, the present framework is capable of self-reexion
and recalibration: it seeks to establish what commonality there exists be-
tween the different kinds of regionalisation process, and nd a useful way
to analyse these phenomena collectively insofar as that turns out to be
possible. In that respect, this paper is both a homage to, and (hopefully)
a renement of, the scholarship of theorists such as Joseph Nye (1968),
who saw the back-to-basics, cards-on-the-table approach as the only way
to solve the problems of rst generation neofunctionalism. My intention
here has not been to reinvigorate that particular body of scholarship, but
rather to emulate the approach Nye adopted to the solution of a difcult,
paradigm-shaping research problem. It is my hope that as regionalisation
scholars we can therefore avoid continuing intra-paradigm schism and
seize the available opportunities for both cross-fertilisation andconceptual
clarity.
NOTES
1 In section 4 of this paper I advocate the use of a different term, regionalisation.
Terms such as regionalism and regional integration are used in sections 13
of this paper in two ways. First, in a general sense and for the sake of variety, as
synonyms. Second, and more precisely, as appropriate to reect the ontologies
of the scholars who worked with the two concepts.
2 The value of EU studies and integration theory for new regionalism scholars,
and the differences between old and new forms of regionalism have been
matters of controversy; see section 2.
3 For an excellent account of the relevant issues, see Rosamond 2000. For a set of
essays exploring the main trends in current (European) integration theory, see
Wiener and Diez 2004.
4 As will be clear from what follows, it is not always apparent whether such
distinctions are considered to be essentially empirical (i.e. differences between
new and old regional projects) or theoretical (i.e. differences between the
NRA and integration theory ` a la neofunctionalism).
5 For instance, the otherwise impressive volume on integration theory edited by
Antje Wiener and Thomas Diez (2004) has no chapter on the new regionalism
approach.
6 Kuhn (1970: 151) argued that communication between paradigms is possi-
ble, and in very rare cases scholars can even convert from one paradigm
to anothernote the religious terminology. However, the complementarity of
paradigms is not high, since although no single paradigm can explain every-
thing, decisions about which questions are the most important to answer, how
answers shouldbe sought, andevenwhichevidence is accepted, drive the indi-
vidual back into the creation of an established corpus of thought and rulesa
vicious circle. Paradigms, therefore, change or collapse only when they become
incapable of explaining a critical mass of matters considered by the paradigm-
subscribers to be signicant, and when there is another putative paradigm to
adopt instead (Kuhn 1970: 77).
768
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
7 I accept that in both EU studies and new regionalism studies, there are schol-
ars who might dispute the value of interdisciplinarity, preferring instead to
see their work as contributing to, and being chiey informed by, normal sci-
ence views of the study of politics/IR (see inter alia Schneider and Aspinwall
2001; Manseld and Milner 1999). However, the fact that this division (normal
science versus interdisciplinarity) exists in both elds is further evidence
of their similarity; moreover, neither set of normal science scholars would
quarrel with the key point here, namely that it is a mistake to emphasise the
differences between new and old regionalisms too heavily.
8 On these two traditions, see Hollis and Smith (1991).
9 Sections 4 and 5 make a tentative attempt at this.
10 The remainder of this paragraph draws on Warleigh 2004: 3037.
11 Calleya (1997: 36) does however put forward his own denition of a region,
arguing that regions require: regularly inter-acting states whose foreign policy
has an impact on each others domestic policy; member states which have
geographical proximity to each other; a ruling group of at least two states;
positive external inuence from third states.
12 These stages are described by Hettne (2002: 3278) as: regional space (a ge-
ographical unit bound together by trade and settlement links); regional com-
plex (embryonic interdependence); regional society (formal membership or-
ganisation covering issues of culture, economics, defence/security and pol-
itics); regional community (based on shared values and transnational civil
society); and regional institutionalised polity (xed regional political struc-
tures with a degree of autonomous power).
REFERENCES
Acharya, A. (2002) Regionalism and the Emerging World Order: Sovereignty, Au-
tonomy, Identity, in S. Breslin, C. Hughes, N. Phillips and B. Rosamond (eds)
New Regionalisms in the Global Political Economy, London: Routledge, pp. 2032.
Bellamy, R. and Castiglione, D. (2003) Legitimizing the Euro-Polity and its
Regime: The Normative Turn in EU Studies, European Journal of Political
Theory, 2(1): 734.
B as, M., Marchand, M. and Shaw, T. (2003) The Weave-World: The Regional In-
terweaving of Economies, Ideas and Identities, in F. S oderbaum and T. Shaw
(eds), Theories of New Regionalism: A Palgrave Reader, Basingstoke: Palgrave ,
pp. 197210.
Breslin, S., Higgott, R. and Rosamond, B. (2002) Regions in Comparative
Perspective, in S. Breslin, C. Hughes, N. Phillips and B. Rosamond
(eds), New Regionalisms in the Global Political Economy, London: Routledge,
pp. 119.
Calleya, S. (1997) Navigating Regional Dynamics in the Post-Cold War World, Alder-
shot: Dartmouth.
Cini, M. (2002) The European Commission, in A. Warleigh (ed.), Understanding
European Union Institutions, London: Routledge, pp. 4160.
Coombes, D. (1970) Politics and Bureaucracy in the European Community, London:
George Allen and Unwin.
Diez, T. and Wiener, A. (2004) Introducing the Mosaic of Integration Theory, in A.
Wiener and T. Diez (eds), European Integration Theory, Oxford: Oxford Univer-
sity Press, pp. 121.
Doyal, L. and Harris, R. (1989) Empiricism, Explanation and Rationality: An Introduc-
tion to the Philosophy of the Social Sciences, London: Routledge.
769
REVIEW OF INTERNATIONAL POLITICAL ECONOMY
Fawcett, L. (1995) Regionalism in Historical Perspective, in L. Fawcett and A.
Hurrell (eds.), Regionalism in World Politics: Regional Organization and Interna-
tional Order, Oxford: Oxford University Press, pp. 936.
Foot, R. (1995) Pacic Asia: The Development of Regional Dialogue, in L. Fawcett
and A. Hurrell (eds.), Regionalism in World Politics: Regional Organization and
International Order, Oxford: Oxford University Press, pp. 22849.
Greenwood, J. (1997) Representing Interests in the European Union, Basingstoke:
Macmillan.
Haas, E. (1958) The Uniting of Europe: Political, Social and Economic Forces, 195057,
Stanford, CA: Stanford University Press.
Haas, E. (1964) Beyond the Nation State: Functionalism and International Organization,
Stanford, CA: Stanford University Press.
Haas, E. (1970) The Study of Regional Integration: Reections on the Joy and
Anguish of Pretheorizing, International Organization, 24: 60746.
Hettne, B. (2000) The New Regionalism: A Prologue, in B. Hettne, A. Inotai
and O. Sunkel (eds), National Perspectives on the New Regionalism in the North,
Basingstoke: Macmillan, pp. xvxix.
Hettne, B. (2001) Regionalism, Security and Development: A Compara-
tive Perspective, in B. Hettne, A. Inotai and O. Sunkel (eds), Compar-
ing Regionalisms: Implications for Global Development, Basingstoke: Palgrave,
pp. 153.
Hettne, B. (2002) The Europeanisation of Europe: Endogenous and Exogenous
Dimensions, Journal of European Integration, 24(4): 32540.
Hettne, B. (2003) The New Regionalism Revisited, in F. S oderbaum and T. Shaw
(eds), Theories of New Regionalism: A Palgrave Reader, Basingstoke: Palgrave,
pp. 2242.
Hettne, B. (n.d.) Beyond the New Regionalism. Available at: http://www.eki/
liu.se/content/1/c4/36/46/autumn%202005/h05%20- %20NPE Hettne 3.
pdf, accessed 28/11/05.
Hettne, B. and S oderbaum, F. (2002) Theorising the Rise of Regionness, in S. Bres-
lin, C. Hughes, N. Phillips and B. Rosamond (eds), New Regionalisms in the
Global Political Economy, London: Routledge, pp. 3347.
Hollis, M. and Smith, S. (1991) Explaining and Understanding International Relations,
Oxford: Clarendon.
Hurrell, A. (1995a) Explaining the Resurgence of Regionalism in World Politics,
Review of International Studies, 21: 33158.
Hurrell, A. (1995b) Regionalism in the Americas, in L. Fawcett and A. Hurrell
(eds), Regionalismin World Politics: Regional Organization and International Order,
Oxford: Oxford University Press, pp. 25082.
Hveem, H. (2003) The Regional Project in Global Governance, in F. S oderbaum
and T. Shaw (eds), Theories of New Regionalism: A Palgrave Reader, Basingstoke:
Palgrave , pp. 8198.
Katzenstein, P. (1996) Regionalism in Comparative Perspective, Cooperation and
Conict, 31(2): 12359.
Kuhn, T. (1970) The Structure of Scientic Revolutions, 2nd edition, Chicago, IL: Uni-
versity of Chicago Press.
Laursen, F. (2003a) International Regimes or Would-be Polities? Some Concluding
Questions and Remarks, in F. Laursen (ed.), Comparative Regional Integration:
Theoretical Perspectives, Aldershot: Ashgate, pp. 28393.
Laursen, F. (2003b) Theoretical Perspectives on Comparative Regional Integra-
tion, inF. Laursen(ed.), Comparative Regional Integration: Theoretical Perspectives,
Aldershot: Ashgate, pp. 328.
770
WARLEIGH- LACK: CONCEPTUAL FRAMEWORK FOR REGIONALISATION
Manseld, E. and Milner, H. (1999) The New Wave of Regionalism, International
Organization, 53(3): 589627.
Mattli, W. (1999) The Logic of Regional Integration: Europe and Beyond, Cambridge:
Cambridge University Press.
Mattli, W. (2003) The Vertical and Horizontal Dimensions of Regional Integra-
tion: A Concluding Note, in F. Laursen (ed.), Comparative Regional Integration:
Theoretical Perspectives, Aldershot: Ashgate.
Mjset, L. (1999) Understanding of Theory in Social Sciences, Oslo: ARENA (ARENA
Working Paper 99/33).
Monnet, J. (1978) Memoirs, London: Collins.
Moravcsik, A. (1999) The Choice for Europe: Social Purpose andState Power fromMessina
to Maastricht, London: UCL Press.
Nye, J. (1968) Comparative Regional Integration: Concept and Measurement, In-
ternational Organization, 22(4): 85580.
Rosamond, B. (2000) Theories of European Integration, Basingstoke: Macmillan.
Schmitter, P. (2004) Neo-neofunctionalism, inA. Wiener andT. Diez(eds), European
Integration Theory, Oxford: Oxford University Press, pp. 4574.
Schneider, G. and Aspinwall, M. (2001) Moving Beyond Outworn Debates: ANew
Institutional Research Agenda, in M. Aspinwall and G. Schneider (eds), The
Rules of Integration: Institutionalist Approaches to the Study of Europe, Manchester:
Manchester University Press, pp. 17787.
Schulz, M., S oderbaum, F. and Ojendal, J. (2001) A Framework for Understanding
Regionalization, in M. Schulz, F. S oderbaum and J. Ojendal (eds), Regionaliza-
tion in a Globalizing World, London: Zed, pp. 121.
S oderbaum, F. (2003) Introduction: Theories of NewRegionalism, inF. S oderbaum
and T. Shaw (eds), Theories of New Regionalism: A Palgrave Reader, Basingstoke:
Palgrave, pp. 121.
S oderbaum, F. and Shaw, T. (eds) (2003) Theories of New Regionalism: A Palgrave
Reader, Basingstoke: Palgrave.
Solingen, E. (1997) Regional Orders at Centurys Dawn: Global and Domestic Inuences
on Grand Strategy, New York: Columbia University Press.
Stoker, G. (1995) Introduction, in D. Marsh and G. Stoker (eds), Theory and Methods
in Political Science, London: Macmillan.
Tel ` o, M. (ed.) (2001) European Union and New Regionalism: Regional Actors and Global
Governance in a Post-hegemonic Era, Aldershot: Ashgate.
Warleigh, A. (1998) Better the Devil You Know? Synthetic and Confederal Under-
standings of European Integration, West European Politics, 21(3): 118.
Warleigh, A. (2003) Democracy in the European Union: Theory, Practice and Reform,
London: Sage.
Warleigh, A. (2004) In Defence of Intra-disciplinarity: European Studies, the
New Regionalism and the Issue of Democratisation, Cambridge Review of
International Affairs, 17(2): 30118.
Wiener, A. and Diez, T. (eds) (2004) European Integration Theory, Oxford: Oxford
University Press.
Wunderlich, U. (2004) Conceptualising the European Union: A New Regionalism Ap-
proach, Paper to the 34th UACES Annual Conference and 9th Research Confer-
ence, University of Birmingham, 68 September 2004.
771
http://ejt.sagepub.com
Relations
European Journal of International
DOI: 10.1177/1354066104047850
2004; 10; 603 European Journal of International Relations
Jean B. Grugel
Strategies in Latin America
New Regionalism and Modes of Governance Comparing US and EU
http://ejt.sagepub.com/cgi/content/abstract/10/4/603
The online version of this article can be found at:
Published by:
http://www.sagepublications.com
On behalf of:
Standing Group on International Relations of the ECPR
can be found at: European Journal of International Relations Additional services and information for
http://ejt.sagepub.com/cgi/alerts Email Alerts:
http://ejt.sagepub.com/subscriptions Subscriptions:
http://www.sagepub.com/journalsReprints.nav Reprints:
http://www.sagepub.com/journalsPermissions.nav Permissions:
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from

New Regionalism and Modes of
Governance Comparing US and EU
Strategies in Latin America
JEAN B. GRUGEL
University of Shefeld
This article explores the extent to which it makes sense to see EU
policies towards the developing world as distinctive. It does so through
a comparative analysis of EU and US policies for the governance of
Latin America, paying particular attention to Mercosur. The conceptual
framework is drawn from theories of new regionalism. Despite some
similarities in so far as issues of economic governance are concerned, I
argue that there are important differences between the EU and the US
models of new regionalism, especially in terms of the discursive
importance attributed to notions of partnership, support for sub-
regional integration, and political and social inclusion. I suggest that
the EU is using new regionalism as a way to lay down an identity
marker of what it perceives as a more humane governance model for
Latin America than that of the USA.
KEY WORDS EU US Mercosur regionalism governance
regulation civil society
Europe, understood here chiey to comprise the European Union (EU),
lays claim to making distinctive policies towards developing countries that
emphasize human rights, citizenship, regional integration, and poverty
reduction, as well as economic growth, liberalization, and global integration
(Lister, 1997). These policies have been linked to a strengthening of
European identity with respect to the rest of the world and the adoption of
more active common foreign policies (Maxwell and Engel, 2003). Never-
theless, the notion that there are identiable European positions and
policies with regard to global issues is a contested one. This is partly due to
European Journal of International Relations Copyright 2004
SAGE Publications and ECPR-European Consortium for Political Research, Vol. 10(4): 603626
[DOI: 10.1177/1354066104047850]
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
the difculties attendant upon dening and understanding what Europe is
and which Europe we are talking about, as well as to the contested nature
of common foreign policy within the EU (Manners, 1998). But it is also the
result of the processes of convergence that took place across the Atlantic in
the 1980s and 1990s and the ways in which the discourses and practices of
globalization have been interpreted. As a consequence of both, doubts have
been raised not only as to whether the EU can sustain a distinctive approach
to NorthSouth issues in the present global order, but more fundamentally,
whether foreign policy itself is possible (see Hill, 2003).
This article explores the extent to which it makes sense to see EU policies
towards the developing world as distinctive and whether we can specify more
precisely the nature of their distinctiveness. It does so through a comparative
analysis of EU and US policies for the governance of Latin America, paying
particular attention to the Southern Cone, a region where both the US and
the EU have embedded and, at times, competitive interests. The rst section
of the article outlines the conceptual frame for the comparison, namely new
regionalism, which refers to the processes by which actors, public or private,
engage in activities across state boundaries and develop conscious policies of
integration with other states (Gamble and Payne, 1996a). The 1990s
witnessed an explosion of regionalism of this type in the Americas, Europe,
and Asia. As I explain, linkages between Latin America and the US and the
EU are now structured through region-building and region-to-region
relationships. Governance is an integral component of new regionalism. The
article then considers the US and European models of regionalism and
explores the philosophy of governance that underpins them. Lastly, I discuss
the salience of any similarities and differences that can be identied.
New Regionalisms as Governance
In the 1990s, the combined weight of the pressures in favour of multi-
lateralism, global economic integration, and the opening of markets in trade,
nance, and production regimes led to a global political economy that
reected the trend towards social and economic globalization and, at the
same time, created pressures within states to mount a new defence of
national economies (Lawrence, 2003). One route through which states
could mediate the range of economic and social pressures generated by
globalization was through regionalism. The new regionalism eschewed
previously protectionist models in favour of open regionalism, that is, the
pursuit of trade deals that were compatible with multilateralism and that did
not formally discriminate against third parties. At the end of the 1980s and
through the 1990s, new regionalist trade deals linked groups of countries
that had no previous history of formal integration, as in the case of the 1988
European Journal of International Relations 10(4)
604
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
USCanada Free Trade Agreement, extended in 1994 to include Mexico
and thereby becoming the North American Free trade Association
(NAFTA). Existing integration pacts were also remade in a more liberal
fashion, as in the EU following the Single European Act in 1986 (Schultz et
al., 2001). New regionalism spread to Asia and the developing world.
The new regionalism, as I have argued elsewhere (Grugel and Hout,
1999), is best understood as a state strategy designed to minimize risks in
the uncertain conditions of economic globalization by promoting activities
at the meso-level of the region (see also Wyatt-Walter, 1995). For some
states, it signies the adoption of reexive strategies to improve their global
market position or, perhaps more properly put, the market position of those
companies with production sites within their geographical boundaries; while
for others, it reects a defensive strategy aimed at securing or holding onto
markets and investment in the face of greater global competition. New
regionalism, then, has emerged principally as a states-led project in the
context of global transformation. It is distinguished from the old
regionalism (based on protectionism, sealed internal markets or security
communities) by an openness to global capitalism and by the porosity of the
emergent regionalist formations to global norms.
The new regionalism radically reshaped the global political economy in
the 1990s and transformed the NorthSouth architecture in the process.
One of its most innovative features was the way in which it pulled countries
together in formalized relationships across the NorthSouth divide that
have, in turn, sponsored informal networks of cooperation. More harmoni-
ous NorthSouth relations were predicated principally upon the turn to
global neo-liberal development models and the reconstitution of the state in
the developing world, as nationalist and protectionist policies were aban-
doned in favour of liberal strategies for growth through trade and
investment. In place of hostility and resentment, then, developing countries
shifted towards seeking accommodation and policy convergence with the
core economies (McMichael, 2000). Nowhere was this conversion as
dramatic as in Latin America. The intellectual home of nationalist/
protectionist development strategies in the Bretton Woods era, Latin
Americas conversion to liberal economics was almost total by the middle of
the 1990s, driven by debt, nancial crises, industrial failure, and collapsing
state infrastructure and capacity (Teichman, 2001). This paved the way for a
softening of the tensions that had characterized relations within the Western
hemisphere throughout the Cold War and for a subsequent realignment of
US policy towards the South.
As is now well known, the US actively sought economic re-engagement
with its own hemisphere in the early 1990s. The Enterprise for the Americas
was launched in 1990 by Bush senior and was designed to lead to a Free
Grugel: New Regionalism and Modes of Governance
605
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Trade Area of the Americas by 2005. Initially, new regionalism offered the
US state a much-needed device through which to negotiate the tensions
generated by global liberalization as well the opportunity to construct a new
framework for inter-American relations (Payne, 1996). New regionalism
appeared as a way to create an institutionalized arena in tune with the needs
of US capital and, at the same time, to shape and contain the burgeoning
new security issues (development, migration, and drugs) in ways that were
both more appropriate and more responsive than the outmoded institutions
of regional cooperation left over from the Cold War. Within Latin America,
meanwhile, new regionalism proved remarkably appealing. Not only did it
make sense for vulnerable regimes immersed in processes of liberalization to
work with Washington, but open regionalism also appealed because it
appeared to signify the possibility of winning stable access to a vital market
in compensation for the adoption of programmes of free market liberal-
ization and the undertaking of unpopular programmes of reform (Grugel,
1996). Hemispheric reconguration was the result, as the US sought to
position itself as the hub of increasingly privatized and open economies and
Latin American states responded with the creation of agreements designed
to facilitate access to the US. Hemispheric integration operates as an
important support for neo-liberalism across the Americas and serves to lock
member states into neo-liberal development policies and trade liberalization
(Hurrell, 1994).
More recently, the free-trade-area project has given way to a complex
patchwork of bilateral agreements as well as hemispheric negotiations with
the US at the centre and subregional pacts, the most signicant of which is
the Common Market of the South or Mercosur (Phillips, 2004a). I will
return to a fuller analysis of Mercosur below; here, the key point to make is
that the drivers behind the diverse patterns of regionalist associations are US
hegemony, the responses of the US state to the challenges of globalization,
changing notions of development within South America and, as a result, the
urgent need of Southern economies to position themselves within the fabric
of a globalizing political economy.
According to Jayasuriya (2003: 339), new regionalism can best be
understood as an attempt at regulation or regional governance. But new
regionalism is not of one piece; the institutional linkages, the coalitional
structures and the policy content that sustain it vary. We should not,
therefore, expect the projects of governance that new regionalism encom-
passes to be identical. In one of the founding texts of new regionalism,
Gamble and Payne (1996a) identied three models of new regionalism,
namely American, European, and Asian. Each has generated different
projects of regional governance in which the texture of NorthSouth
relationships, the institutional architecture, and policy range vary. For
European Journal of International Relations 10(4)
606
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Marchand et al. (1999), these differences are such that they prefer to speak
of new regionalisms, in the plural. Diversity within new regionalism is
inevitable, argue Gamble and Payne (1996b: 253), because of the different
structures of power and production that have emerged over time in each of
these three core regions. Moreover, region-building is shaped by the
symbols that reect and recreate the identity of states and societies, for
regionalism is a process of identity creation as well as the fashioning of a new
political-economic landscape. Nevertheless, such differences in regionalist
projects are often missed, chiey because the debate on regionalism has been
shaped by the regionalist project in North America, which has come to be
seen as the stereotypical model (Gamble and Payne, 1996b: 253).
Europe could not stand outside the new regionalism in the 1990s. But its
engagement with new regionalism draws on the distinctive historical
trajectory of integration which is linked, inside Europe, to processes of
economic growth and security and, externally, with the global projection of
European values and interests. Given that region-building has been a feature
of European politics since the 1950s, the EUs conversion to new
regionalism was inevitably rather less dramatic than that of the US.
Nevertheless, in making its own response to the transformation of the global
political economy, dramatic internal and external changes were introduced.
In so far as European internal structures are concerned, deeper integration
and harmonization through policies such as the introduction of the common
currency and enlargement have become the order of the day. Europes turn
to new regionalism also ushered in important changes with the South. These
changes have been driven by the liberalization of European economies and
the attempt to reposition Europe within the new global political economy,
prompting a realignment of Europes global political economy in ways not
dissimilar to that of the USA; they are also an outcome of a generalized view
on the part of some member states, European bureaucrats, and civil society
alike that the old European instruments of engagement with the develop-
ing world were outmoded or no longer effective. In particular, by the 1990s,
there was broad recognition that preferential trade deals, one of the
cornerstones of EU development policies, could no longer be sustained in
an increasingly multilateral global trading environment (Dearden, 2002).
Lastly, the EUs turn to new regionalism was stimulated by competition with
the USA for markets and investment.
The language the EU talks when speaking to or about the South and
within the new regionalist constructions is signicantly different from that
employed by Washington. In particular, the European model is explicitly
couched in terms of partnership a word that became almost the mantra
of EU development policy in the 1990s (Maxwell and Riddell, 1998).
Although to some extent merely a linguistic device, the concept of
Grugel: New Regionalism and Modes of Governance
607
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
partnership is not entirely without signicance. Despite the vagueness of the
term, partnership can be understood to represent an idealized relationship
based around notions of equity and cooperation that ignores or transcends
the underlying power inequalities (Lister, 2003). Partnership challenges the
notion of hierarchy and, as such, does not t easily with openly hub-and-
spoke models of new regionalism. Instead, the EU has endorsed the pursuit
of inter-regionalism, that is an agreement between two distinct but equal
regions (see Patten, 2002). A new inter-regionalism emerged in the 1990s,
bringing EU policy up to date with global transformations. It is based on the
promotion of good government and development through dialogue and the
implementation of mutually agreed and negotiated policies between two
geographically distinct regions (Gilson, 2002). The new inter-regionalism
attempts to go beyond economic governance to embrace political and
institutional reform and social inclusion and, at the same time, seeks a
discursive mediation of the power inequalities between Europe and the
South. It is, therefore, more explicitly concerned with politics and institu-
tion-building than the US market-led pattern of new regionalism and
endorses a NorthSouth model of global cooperation in which the North
assumes some responsibilities for the development of the South.
New Regionalisms in the Western Hemisphere
The politics of new regionalism in the Americas have been indelibly shaped
by the USs unquestionable global and regional hegemony. From the
creation of NAFTA in 1994 through to the Free Trade Area of the Americas
(FTAA), negotiations which have dominated the past ten years of hemi-
spheric relations, the goals of the US have been mainly ideological
regionalism is seen in Washington as a vehicle through which to create a
stable mode of liberal economic governance across an area that has suffered
not only severe and dislocating crises, but also dramatic policy swings
between openness and protectionism. These are interpreted as having
contributed, in turn, to the political and security crises in which the US has
found itself embroiled to its cost, as in the 1980s (Smith, 2000). Hence neo-
liberalism, which imposes trade and tariff discipline and, in Washington at
least, is associated with political stability and liberal democracy, lies at the
centre of this mode of governance. Neo-liberalism in the Americas and US
hegemony are inextricably entwined (Phillips, 2003a).
Nevertheless, for the US, as global hegemon, the pursuit of new
regionalism in the Americas is only one of its several strategic concerns
the politics of new regionalism in the Americas, in other words, is caught up
in the USAs wider global interests. As a result, the FTAA agenda has come
progressively to map directly onto the USs pursuit of multilateralism. This
European Journal of International Relations 10(4)
608
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
stands in sharp relief with the expectations generated by the signing of
NAFTA in 1994. The subsequent opening of US markets to Mexican
products (albeit partial and staggered) created widespread hopes that the
USA would liberalize its own markets to Latin America, thereby mirroring
the liberalization that was already under way in the South. The possibility of
levelling the playing eld in hemispheric trade thus ultimately lay behind
Latin Americas endorsement of the hemispheric integration project. The
prospect of market opening was similarly responsible for the reinvigoration
of subregional pacts within the Americas, the attraction of which, was at least
partially, that they were more appropriate vehicles through which to
negotiate access to the US market than bilateral negotiations. This project of
sweeping trade liberalization has gradually been whittled away. The array of
protectionist measures that shelter key US goods from competition have not
been dismantled and protectionist interests within the US state remain
extremely inuential (Fischer, 2001). Moreover agriculture, perhaps the key
sector for Latin America in terms of external trade at least, has effectively
been excluded from the negotiating agenda and the USA has refused to
review its commercial defence legislation. That it has not done so is
indicative of the failure of the hemispheric project to win wide-ranging
support within US society. The project of trade liberalization has also fallen
foul of the US decision to tie the hemispheric negotiations into the global
agenda of trade talks. Here, the US overwhelmingly seeks a favourable
resolution of new trade issues (intellectual property rights, government
procurements, and global investment policy) rather than the more con-
tentious issue of market access and trade expansion in which US businesses
will undoubtedly suffer losses and these issues have inevitably spilled over
to dominate the regional trade negotiations as well.
Not surprisingly in light of the above, the US preference is for rules-based
integration. The building blocks of the integration process are thin, in so far
as formal institutions are concerned, and the FTAA depends upon the
adoption and extension of rules governing trade, investment, business, and
the role of the state. As Phillips (2004b) notes:
The economic project in the Americas is not a sort which envisages the
construction of genuinely region-level regulatory structures in the construc-
tion of supranational regulatory bodies, comparable to those which are
emerging . . . in the EU. The challenges of governance and regulation in the
Americas relate instead to the construction of a regime of rules.
The US preference, then, is for governance through the implantation of
rules and legislation in Latin America, rather than through supranational
institution-building. Moreover, this approach allows the US to determine
the pace of integration. Instead of institutions, integration moves forward
Grugel: New Regionalism and Modes of Governance
609
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
through summitry and rounds of regular ministerial talks across the
Americas in which US acts as the hub and US policy developments are the
main reference point. US concessions in market access have been limited and
mainly on a bilateral basis, and have been presented as a reward for
conscientious adherence to liberalization. As a result, the pace of the FTAA
negotiations has gradually faltered as the easy phase of integration has
come to an end.
It is perhaps not surprising, in light of the above, that the early enthusiasm
for hemispheric regionalism within Latin America is now somewhat tem-
pered. Perceptions are increasingly not that the rewards for liberalization
(market access, crucially) are slow in coming, but that they may not come at
all (Marquis, 2004). In this sense, it is important to note the failure in the
Miami summit in November 2003 to reach agreement on further liberal-
ization (Puentes, 2003). The FTAA looks, from the Latin American
perspective, to be turning into simply a device for strengthening the USs
presence and US investments within Latin America in something of a zero-
sum game. It runs the risk of being perceived as a process of annexation, as
Brazilian President Lula da Silva dramatically put it (Blustein, 2003).
In light of the slow-down in hemispheric integration, the strength of
subregionalism in South America is striking. There is now some ambiguity,
moreover, as to whether the subregional associations are whole hearted in
their endorsement of neo-liberal development, especially if it does not win
them access to global, preferably US, markets. Mercosur, in particular,
represents a more mixed approach to development, based on a combination
of tariff protection alongside strategic liberalization. Formed in 1991, it
groups together Brazil, the largest economy in Latin America, with
Argentina, Uruguay, and Paraguay. It is an imperfect customs union, set
within a broad and exible institutional framework, the goal of which is to
foster regional integration at all levels through intergovernmental coopera-
tion (Bouzas and Soltz, 2001: 96). It benets from a large internal market
that is considerably more important than the export sector. Mercosur, which
comprises a market of 2000 million people, fully one-third of the population
of Latin America and more than half of its total GDP, aims to complete its
own internal market by 2006. Progress in this respect is slow, however, and
has been stymied by currency devaluation in Brazil in 1997, followed by
economic crisis in Argentina after 2001. But, just as progress towards
economic integration slowed, Brazilian activism within it increased and
Mercosur has gradually been turned into a strategic and political platform
for the larger countries within it (Phillips, 2003b: 221). If anything, this has
become more marked following the elections of Lula in Brazil in 2002 and
of Nestor Kirschner in Argentina in 2003, for both are suspicious of
European Journal of International Relations 10(4)
610
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
unregulated markets and are committed to a new phase of cooperation and
activism within the South (Tuckman, 2004).
In line with its new-found dynamism, Mercosur has embarked on a
programme of economic integration schemes within South America. Chile
and Bolivia are already associate members and a free-trade deal with the
Andean Community is scheduled. The key driver to the new-found
expansionism is the complex set of overlapping interests uniting Brazilian
industrial exporters and agricultural producers and representatives of the
Brazilian state. Brazil is the largest economy by far within Mercosur, with
around 70% of Mercosurs total GDP, making the Latin American market
important for Brazilian industry. Meanwhile, Brazilian state interests, long
identied as seeking leadership within South America, have considerable
latitude in so far as foreign policy is concerned (Lafer, 2002). At the same
time, the idea that Brazil will lead South America in some way is
enormously popular inside the country (Price and Sztabinski, 2003). The
sense that Mercosur is emerging as the nub of a putative South American
bloc is reinforced by its more aggressive bargaining strategy vis-a-vis the
FTAA (Carlsen, 2003). In sum, Mercosur is potentially evolving towards the
status of an alternative project of integration (a new regionalist project in its
own right) driven by a complex combination of political and economic logic
that goes beyond the simple question of market access. Mercosur is now
aiming to deepen and widen economic intercourse within South America
and its prole is less that of a building block on the road to a hemispheric-
wide free-trade agreement and more that of an alternative to it. As such, it
is becoming an attractive partner in other region-to-region alliances that aim
to rival or contest the USAs dominance of the South American space.
What conclusions can we draw from this brief overview of the new
regionalism in the Americas? First, it is clear that US-led regionalism is
predicated upon the US acting as the hub state. Second, US activism in the
area is shaped by the USs role as global hegemon and its global preferences.
Third, the dominant development model underpinning the FTAA is neo-
liberal. The FTAA is seen in Washington as a device that will keep South
American trade liberalization on track and open for business. Nevertheless,
the US rejects reciprocal liberalization in the sectors that really matter for
Latin America, especially agriculture (Hakim, 2003). Fourth, institution-
building is thin and progress depends upon processes of rules assimilation in
different national contexts. Last, there are no central institutions envisaged
within the FTAA that are charged with promoting equitable growth. The
FTAA strategy is a one-size-ts-all approach to growth and development
across the 34 states that make up the FTAA space. For all these reasons, the
US sees subregional pacts such as Mercosur as temporary and ultimately as
Grugel: New Regionalism and Modes of Governance
611
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
hindrances to the FTAA process and therefore designed to wither away
once the FTAA is completed.
The EU and Regional Governance in the Southern Cone
Latin Americas international relations were stunted by the USAs fear of
extra-hemispheric intervention for most of the 20th century and especially
during the Cold War (Atkins, 1977). As a result, substantive political ties
between Europe and Latin America date only from the 1980s. During the
time of the Central American wars and the debt crisis, a range of differently
situated European actors (the various institutions of the European Commu-
nity, member-states, and civil society organizations) contributed to the
emergence of dense networks of social and political relations between
Europe and Latin America. This was followed by aid programmes and later,
in the 1990s especially, by European investment in the privatized economies
of the larger Latin American countries (Crawley, 2000).
The EU now lays claim to a set of interests in the region that go beyond
questions of economic governance to embrace a range of social and
development issues (European Commission, 2003a). Of course, Europe has
neither the mandate nor the material power to impose norms within Latin
America, and is, in any case, unwilling to bear the costs of doing so.
Nevertheless, the EU consistently tries to encourage a shift within Latin
America towards balanced growth, social responsibility, and what it sees as
good governance through diplomacy and foreign policy, elite interaction,
policy advice, political summits and EU-sponsored seminars. The EU seeks
to transfer examples of its own best practice to Latin America. In 2003, for
example, the EU embarked on a set of initiatives in Latin America based
around the theme of social exclusion, including research funding, seminar
programmes, and the creation of a fund to provide for the regular exchange
of ideas within Latin America, in imitation of the EUs own policies (Da
Camara, 2003). Signicantly, the EU has also sought to broaden the social
bases of its relationships in and with Latin America to include not only elites
and governments, but also civil society actors (Grugel, 2000). The EUs
relationship with Latin American civil society actors has deepened con-
siderably since the introduction of aid policies that channel funds directly to
Latin American social actors (Freres, 2000). These policies are not only
different from the US approach, they also constitute a challenge, timid and
partial but nonetheless real, to US hegemony in the region.
EU interest has centred particularly on the larger of the Latin American
countries since the 1990s, including Mexico, Chile, and Mercosur in
particular. This interest has developed almost in parallel with the hemi-
spheric free-trade negotiations led by the US. EU agreements in the 1990s
European Journal of International Relations 10(4)
612
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
included an expanded budget for economic cooperation the fostering of
business contacts, technology transfer, cooperation of services, and industrial
cooperation. As a result, more than 50% of EU funding to Argentina, for
example, between 1990 and 1998 consisted of forms of economic coopera-
tion that were designed to increase Europes investment presence. Schemes
such as the European Community Investment Partners (ECIP), which
offered grants and support for European companies setting up joint
ventures, and AL-INVEST, which promotes direct investment and business
contacts by sector, have also provided funds to encourage European
investors into Latin America.
But EU interest in Latin America is not conned to questions of trade and
investment. The relationship with Mercosur, in particular, has been marked
out as a strategic and long-term partnership. This is partly motivated by a
view that, institutionally, Mercosur is evolving towards a process of
integration modelled on the EU (Kaltenthaler and Mora, 2002). The range
of concerns that EUMercosur agreements embrace and the weight given to
political and institutional development indicate a relationship that is self-
consciously distinct from the USs integration agenda with South America.
Chris Patten (2000), the EU Commissioner for External Affairs, describes
the EUMercosur relationship in the following terms:
What is at stake in the EUMercosur negotiations is the possibility for a
strategic, political and economic alliance between the only two real common
markets in the world. The prospective association agreement will not only
provide for short-term nancial gains and closer political ties. It will create a
free trade area covering nearly 600 million people. By doing this, it will
generate democratic development, growing prosperity and respect for human
rights. Where prosperity reigns, democracy and human rights can take root.
Beyond free trade and greater prosperity, we will have to overcome the
problems of poverty, injustice and exclusion . . . Increasing business opportu-
nity can never be an end in itself . . . It is the duty of governments to ensure
that the benets of these processes are widely shared. A fair distribution of
wealth and the elimination of extreme poverty make sense not only politically,
but also economically: with increases in consumption capacity come new
investment possibilities.
The building blocks of the new deal that will link the EU and Mercosur
are set out in the Inter-Regional Framework Cooperation Agreement of
1995. They are political dialogue, aid policies, and the reciprocal liberal-
ization of trade and investment. These are intended to lead to the creation
of an inter-regional association of a political and economic nature based on
enhanced political cooperation (Framework Cooperation Agreement
Between the EU and MERCOSUR, 1996). Nevertheless, progress, in terms
of trade liberalization especially, has been slow and negotiations only
Grugel: New Regionalism and Modes of Governance
613
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
seriously got under way in 2001. The difculties that attach to market
opening in the EU are mainly to blame; but divergent interests within
Mercosur, which meant that the member-states were unable to agree upon
common negotiating proposals for a long time, and the economic collapse of
Argentina in 2001 followed by the effective suspension of trade preferences
within Mercosur also hindered progress. Certainly, the impact of the
political and psychological fallout from the Argentine crisis on the negotia-
tions cannot be overestimated, especially in the short term, since it put
European capital at risk and threatened the unity of Mercosur itself. At the
time of writing (June 2004), the pace of negotiations has increased and
there is a possibility that association status will be achieved in 2004. A nal
roadmap for the conclusion of the EUMercosur negotiations was agreed in
November 2003 (European Commission, 2003c). Even if the talks are
prolonged, the 1995 agreement identies core elements of a governance
strategy for the Southern Cone based on economic openness and an
enhanced market position for European capital, the consolidation of
democracy, the promotion of subregional integration, and deepening
consultation with non-state actors, especially in the areas of economic and
social development.
Economic Governance
The Mercosur countries attracted considerable European investment in the
1990s. As a result, European foreign direct investment in Mercosur
countries now represents around 50% of all foreign investment in Latin
America (Inter-American Development Bank, 2002). Economic liberal-
ization in the Southern Cone in the 1990s also created an important export
market for European businesses; EU exports to Mercosur were worth
around 24,000 million euros in 2001, roughly similar to the value of
imports (European Commission, 2003b). In Mercosur, the value of
Spanish-owned banks alone is greater than that of US banks (GTAmericas,
2002). Taken together, these indicate that Mercosur is a strategically
important arena for European investment. Unsurprisingly, then, EU policies
for the Southern Cone are designed to maintain and police open markets. At
the same time, they aim to cement the current critical take on the FTAA
within Mercosur and x the EU, rather than the US, as the principal pole of
the Southern Cone economies.
The process of mutual trade liberalization that the EUMercosur
Agreement promises is intended to create a preference for European
investment across the region. Access to EU markets is designed to
compensate Mercosur for accepting the inclusion of the new investment
agenda of government procurement and provide European companies with
European Journal of International Relations 10(4)
614
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
a head start in this area. At the same time, the EU is using the negotiations
set in train by the Agreement to protect its current market position. In
particular, the EU negotiating position is that, should Mercosur go on to
conclude a hemispheric free-trade deal within the Americas, tariffs with the
EU cannot then be raised since negotiations to eliminate them are already
under way (Tacone and Noguiera, 2001). To sum up, the Agreement offers
Mercosur access to the lucrative EU market in return for a commitment to
continued economic liberalization, combined with cooperation to protect
and deepen EU interests across a range of non-trade issues such as
investment and procurement.
As with the FTAA, however, open integration between the EU and
Mercosur is easier to set out than to achieve. In the rst place, there is
resistance in Brazil to opening the markets of Mercosur any further, whether
to the US or the EU, if there is no immediate and visible compensation in
terms of greater access to external markets for agricultural goods produced
inside Mercosur. The context of the negotiations with the EU only
accentuates these difculties, for the collapse of the Argentine economy has
created region-wide fears that a too rapid economic opening could be both
destabilizing and impoverishing. Second, the liberalization of EU markets
has costs for the European farming lobby and, as such, has encountered
opposition from within the EU. While estimates have consistently empha-
sized that the EU economies will benet disproportionately as a whole
(IRELA, 1999), opening agricultural markets to Argentina and Brazil will
mean severe competition for temperate European agriculture. As a result,
although agriculture is not excluded from the negotiations, EU offers
remain quota based, on the understanding that detailed discussion of
agricultural protectionism should take place in the context of World Trade
Organization negotiations. Despite these problems, Mercosur trade negotia-
tors proved more interested in 2003 and 2004 than in earlier years in
prioritizing trade discussion and the opening of markets with Europe
(Mercopress, 2003).
The relative slowness of the trade talks and the difculties in reaching a
rm agreement should not be taken as signs of failure, then. Even if they are
inconclusive and drag on beyond 2004, the talks have an important role to
play. From the EUs perspective, they are part of the longstanding bid to win
a greater share of the markets within Mercosur. Moreover, the EU is using
the talks to press for discussion on a range of business facilitation measures
designed to increase European investment in the region. In 2002, the EU
made clear its willingness to press ahead with the reform of non-tariff
barriers to interregional trade in order to bind the Southern Cone into the
European trade axis (Seventh Meeting of the EU-MERCOSUR Bi-regional
Grugel: New Regionalism and Modes of Governance
615
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Negotiations Committee, 2002). For Mercosur, meanwhile, the negotia-
tions form part of the long-term strategy for diversifying its global market
position and, at the same time, signal to the US that the FTAA is not its only
trade option. Understood in this way, Kloms (2003) point that both the
EU and Mercosur have embedded interests in continuing negotiations (even
if a deal is elusive) makes sense, for the talks offer a range of immediate
benets to both sides and delay the moment when domestic interests groups
will have to assume the costs that trade liberalization will inevitably imply.
Regulating the Political and Institutional Environment
If the EUs project of economic governance is similar to that of the US, then
the EUs notion of the kind of political and institutional environment in
which open markets are embedded is rather different. The EU has a
longstanding vision of itself as a mirror for the political and institutional
development of the Southern Cone. Political and cultural similarities mean
that the countries of the Southern Cone tend to be viewed by EU elites as
Europe in exile, in the telling phrase of the Argentine writer Jose Luis
Borges. As a result, the EU has developed a conscious political leg to its new
regionalism, absent from the FTAA, and which is based around the
promotion of its own model of democracy, social welfare, and regional
integration. These latter come as a package regional integration is seen
as a way of managing social and political conict and a device for spreading
the cost of regional public goods and for embedding liberal democracy.
Social inclusion is thought to minimize the risk of zero-sum politics, the
collapse of democracy and the end of economic growth. The EU, in other
words, endorses a model of liberal economic governance in which the
market is mediated by authoritative supranational regional institutions
(European Commission, 2004). Moreover, it offers a strong endorsement of
subregional integration within Latin America, in contrast to the US view
that subregional integration in Latin America should function principally as
a building block for hemispheric integration.
The negotiations, at least until 2004, have taken place against a backdrop
of economic crisis and governmental instability in Argentina, hard-fought
presidential elections in Brazil, and trade disputes between the two
economies that keep Mercosur together, Brazil and Argentina. As a result,
the EUMercosur negotiations are perceived in Europe as a set of
supportive structures for Mercosur. Negotiating documents reiterate end-
lessly the importance of the EUs model of capitalism for Mercosur; they
also emphasize the introduction of social welfare policies alongside pro-
grammes of business promotion, investment, and trade liberalization. Patten
(2001) seems to view democratic governance as endogenous to the
European Journal of International Relations 10(4)
616
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Southern Cone and argues that Mercosur can model its own development
patterns on those of the EU. Other EU institutions make similar assump-
tions about the transferability of European norms to the Southern Cone.
The European Economic and Social Council (ECS), for example, says that
the EUMercosur relationship should proceed:
based on sharing the core values of the European Union, especially the
concept of the European social model, which combines free market aspects
with social dialogue and public participation through civil society, and [should
be] of a more ambitious scope than simple trade agreements (Economic and
Social Council, 2002).
As well as promoting the European notion of market capitalism regulated
by states or regional bodies, the EU is also attempting to provide Mercosur
with a roadmap for its own process of integration (Sanchez Bajo, 1999). As
such, the negotiations have become an opportunity to shape the internal
norms that govern Mercosur and to signal the EUs unwillingness to tolerate
Mercosurs collapse. Despite the economic difculties and political turbu-
lence in the Southern Cone between 2001 and 2003, the tempo of the
negotiations increased in 2002. The EU, moreover, has made clear the
importance it attaches to Mercosur pushing ahead with its own agenda of
integration in January 2002, the European Commission expressed its
view that Mercosur is the key to development within the area (European
Commission, 2002a). The view that region-building between the EU and
Mercosur will be facilitated by deeper integration within Mercosur itself has
been backed up by a series of EU grants. These include support for the
development of institutions internal to Mercosur, including the Joint
Parliamentary Committee and the Economic and Social Consultative Forum
of the Mercosur (j9 million), customs harmonization programmes (j5
million), technical norms and standardization (j4.135 million), support for
the single market (j4.6 million), and macro-economic coordination (j2.5
million) (European Commission, 2002a). In September 2002, the EU
launched the Regional Indicative Programme with Mercosur which released
a further j48 million for programmes in support of the internal market,
institution-building, and civil society inside Mercosur (European Commis-
sion, 2002b).
Civil Society Inclusion
For the EU, new regionalism is part of a signicant shift in the kind of
development strategies it endorses. The new approach emphasizes not only
the market, however, but also endorses the activism of a broad range of
society-based actors. The new regionalism is conceptualized as a stimulus to
Grugel: New Regionalism and Modes of Governance
617
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
governance through social networks, underpinned by a reliance on civil
society to deliver and oversee policy, in contrast to state-led development
strategies. As a result, civil society organizations, both in the EU and in
Mercosur, are seen as playing a crucial role as agents of development. Of
course, the centrality of the market in the global political economy means
that the participation of business, trades unions, and non-governmental
organizations (NGOs) is important to all forms of new regionalism (Tussie
and Botto, 2002). Nevertheless, it is particularly marked and civil society
participation is unambiguously endorsed (even if it is not fully effective)
within the European model of new regionalism.
The EU tends to assume that civil society is a homogenous whole. In fact,
however, civil society is a contested space and relations within it are
conictual. As a result, civil society groups have different interests and
unequal resources. Consequently, in practice, European civil society groups
have unequal access to the negotiations. The two sectors of EU civil society
most directly concerned and involved with the negotiations are business
groups and the development NGOs that deliver and partially design
European aid policies (Kohler-Koch and Eising, 1999; Grugel, 2000). The
present structure of trade-led negotiating rounds means that private sector
business groups are privileged in terms of access. EUMercosur business
meetings tend to run parallel to the ofcial negotiations and are awarded
high priority by EU ofcials. Business groups have their own MercosurEU
Business Forum (MEBF), the role of which is to organize private sector
meetings between EU and Mercosur business groups and arrange working
groups on aspects of the negotiations that feed into the Bi-regional
Negotiating Committee, the formal body charged with the negotiations
(Devlin, 2000). Moreover, the MEBF ags up the investment and trade
opportunities across the private sector and serves as an informal channel for
information on investment opportunities. Its ofcial views are, as might be
expected, reective chiey of the opinions of dominant European private
sector interests keen to take advantage of investment opportunities in the
Southern Cone. As a result, a major issue is the market position of EU
companies inside Mercosur vis-a-vis their US counterparts (MercosurEU
Business Forum, 2002). Mercosurs business groups are also active within
the MEBF. The Forum operates chiey as an arena for them to press for a
greater input in Mercosur itself. They are particularly concerned to prevent
the Forum being used to lobby the governments of Mercosur to push for
the strategic protection of specic sectional interests in the Southern Cone
and as a space through which to manage the internal tensions within
Mercosurs industrial groups over the costs of liberalization (Sanchez Bajo,
1999).
European Journal of International Relations 10(4)
618
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Business groups, then, enjoy a signicant degree of stable, institution-
alized access to the negotiations. Other civil society groups, however, have a
less privileged position within the negotiating machinery. Nevertheless, their
importance is growing. This is particularly so in the case of the European
development NGOs that have longstanding relationships inside the South-
ern Cone. A range of European groups, including policy and academic
institutes, development NGOs, human rights organizations, consumer
groups, cultural associations, and immigrant organizations have taken part in
two rounds of formal consultation between the European Commission and
civil society movements which were held in Brussels in October 2000 and
February 2002. Both attracted more than 200 individuals, representing
mainly European groups. Nevertheless, the format means that the consulta-
tion is more ceremonial than substantive. The consultations were one-day
events and notication of presentations or interventions were required in
advance, with the result that engagement at the consultations was relatively
limited (European Commission, 2000, 2002c). It is also unclear where the
recommendations of the Civil Society Forum go it lacks the same input
into the negotiating machinery than business enjoys. Nevertheless, civil
society opposition to what was seen as a trade and investment-led agenda
was clearly voiced at the consultations. Moreover, it should not be assumed
that European development NGOs are opposed to the content of the
negotiations en masse. Many have responded positively to the emphasis on
welfare, human rights, democracy, and dialogue that cements European new
regionalism, even while they express disquiet over European support for
economic liberalization (Oxfam, undated).
Nevertheless, European NGOs are undoubtedly less inuential that
European business groups. This has been compounded by the fact that their
civil society counterparts in the Southern Cone tend not be part of the
MercosurEU process. Southern Cone NGOs, citizenship groups, and
human rights organizations are not only weaker than their European
counterparts, but tend to be more focused on the FTAA agenda (Tussie and
Botto, 2002). Mercosur, meanwhile, has few mechanisms for forms of civil
society representation beyond that of business (Guinazu, 2002). Addition-
ally, there have been few EU-funded programmes to increase civil society
cooperation between the two regions (Freres, 2002). The outcome is that
the texture of interaction between the EU and Mercosur in so far as bottom-
up civil society groups are concerned is surprisingly thin, and despite
enthusiastic endorsements of social inclusion and participation, input from
these groups tends to be limited to primarily European actors. In sum, the
rhetorical commitment to inclusion is there; but there are, as yet, few signs
that it is active and inuential.
Grugel: New Regionalism and Modes of Governance
619
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Conclusion Competing Modes of Governance
This article has interpreted new regionalism as a layer of governance within
the global polity (Payne, 2000). It is part of the shift to patterns of
regulation through market discipline, elite consensus, the dissemination of
norms, and the incorporation of private sector actors as agents for the public
sphere (Murphy, 2000). Specically, new regionalism provides a framework
for the ordering and regulation of the South. Both the FTAA and the EUs
relationships with Mercosur establish new regulatory frameworks for the
governance of the Southern Cone. Nevertheless, they advance rather
different models of regulation.
Both rest, very centrally, on discourses of economic liberalization. Both
aim to push economic liberalization in the South beyond the levels agreed
and policed by the WTO. It is interesting to note that powerful protectionist
interests in the cores appear to be blocking substantive progress in this
respect in both cases. The consequence, in both cases, is the privileging of
new issues of investment and government procurement over market access,
in terms of economic governance. These similarities are undoubtedly rooted
in the fact that elites in the EU and in the US share a broad commitment to
development through the liberalization of global markets. That they are
similar is also reective of the simple fact that the US and the EU are also
engaged in competition for markets in the Southern Cone.
Nevertheless, there are also some differences that should be noted in
terms of the economic agendas advanced through the FTAA and the EU
association deal with the Southern Cone. Most importantly, there is less of
a sense of compulsion in so far as the EU agenda is concerned. In the rst
place, EU-sponsored new regionalism is less explicitly coupled with multi-
lateral negotiations. The FTAA, meanwhile, is inevitably entwined with the
USs global agenda. It is also part of the overall package of US foreign policy
in the Americas, dominated as much by concerns about labour migration to
the US and security as trade issues. As a result, the FTAA agenda elides into
other, overlapping US interests in the Americas. Moreover, the FTAA makes
no substantive recognition of subregional difference within South America
or of the fact that Mercosur, and Brazil especially, are signicant players in
the global economy. The EU, by contrast, has few strategic interests beyond
trade and investment at play in Latin America. At the same time, the EU has
few instruments of coercion. Mercosur is not compelled in any way to sign
up to a deal with the EU and the negotiating procedures are, consequently,
less conictual. For the EU, moreover, Mercosur, as it stands, is an attractive
and desirable partner and the EU is committed to supporting its internal
cohesion.
Beyond questions of economic governance, there are other important
European Journal of International Relations 10(4)
620
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
differences. All governance strategies are premised on normative assump-
tions about how the world should be; in the case of Europe, this means a
view that economic liberalization should be accompanied by support for
democracy, rights, social inclusion, and regional integration. In discursive
terms at least, the political components of the EUs new regionalism are as
important as the elements of disciplinary governance through the market.
The EU also displays sensitivity not just to the role of civil society as a bloc,
but also to particular actors within civil society, including grassroots
development groups, however limited their role in practice might be. We can
conclude, then, that the EUs approach to region-building with Mercosur is
an attempt to diffuse and embed European norms outside of Europe. The
EU aims to shape visions inside Mercosur of what regionalism should be and
of where it ts in the world. As such, it reects specically European
perspectives on region-building and development, built up through years of
patterned and regular engagement under conditions of nominal equality
with the developing world. In this, it draws on ideas embedded in the EU of
responsibility for the developing world (Holland, 2002).
So much, then, for the differences and similarities between the EU and
the FTAA within the Southern Cone. Can more general conclusions be
drawn from these differences in the models of new regionalism? I would
argue that, to a degree, they can. Most signicantly, the persistence of a
distinctive model of European regionalism would seem to suggest that there
is, as yet, no single narrative of liberal global governance. Perhaps
surprisingly, little attention has been paid to the signicant divergences
between the US and European projects of regulation for the developing
world. Since the end of the Cold War, the EU has pursued as a central
objective the establishment of a distinctive foreign and security policy
(Whitman, 1998). Material dependence on the US acts as an important
limitation on this project.
Nevertheless, new regionalism appears to constitute a relatively safe space
within which Europe can display identity and norm difference from the US.
The EU can lay down an identity marker of what it perceives as a more
humane governance model in its relations with the developing world,
without having to confront or contradict US power head-on, in a display of
what Manners (2002) terms normative power. The result is a distinctive
model of governance towards the developing world, assisted by the
development of strong European positions on the environment, debt, aid,
the deployment of military power, and the nature of human rights (see the
debate in The Washington Post on 1 July and 9 July 2002 between Robert
Kagan and Chris Patten over the International Criminal Court for an
exceptionally frank airing of some of these differences). Moreover, Nye
(2003) speculates that these divergences may have actually widened in the
Grugel: New Regionalism and Modes of Governance
621
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
wake of the events of 11 September 2001. For the EU, then, new
regionalism is about more than how it copes with globalization. In contrast
to the US, where the new regionalist agenda is essentially linked to the
recreation of hegemony and the pursuit of multilateralism, the EU is
attempting to establish new and deeper regional relationships in order to
cope with and mitigate the impact of US power. New regionalism thus offers
the EU a chance of reafrming its role as a global actor; in creating a
relationship with Mercosur, the EU also remakes itself.
Acknowledgement
I would like to thank the Nufeld Foundation (Award No. SGS/00730/G) and the
ESRC (Award RES-000-22-0427) for support in carrying out the research published
here.
References
Atkins, G.P. (1977) Latin America in the International Political System. New York:
Free Press.
Blustein, P. (2003) Trade Talks End in Vague Accord, The Washington Post, 21
November.
Bouzas, R. and D. Soltz (2001) Institutions and Regional Integration: The Case of
MERCOSUR, in V. Bulmer-Thomas (ed.) Regional Integration in Latin America
and the Caribbean: The Political Economy of Open Regionalism, pp. 95118.
London: Institute of Latin American Studies, University of London.
Carlsen, L. (2003) The Free Trade Area of the Americas: A Broken Consensus.
http://www.americaspolicy.org/columns/amprog/2003/0312/ftaa.html.
Crawley, A. (2000) Towards a Biregional Agenda for the Twenty-rst Century,
Journal of Interamerican Studies and World Affairs 42(2): 934.
Da Camara, Gomes Francisco (2003) Seminar on Social Cohesion in Latin American
and the Caribbean, Brussels, 56 June.
Dearden, S. (2002) Does the EUs Development Policy Have Any Future? Discussion
Paper 24. European Development Policy Study Group, Development Studies
Association.
Devlin, R. (2000) The Free Trade Area of the Americas and MERCOSUREuropean
Union Free Trade Processes: Can They Learn Something from Each Other? INTAL-
ITD Occasional Paper 6.
Economic and Social Council (2002) Opinion of the ECS on the EUs Relationship
with Latin America, May. Brussels: ECS.
European Commission (2000) Conference on EUMercosur and EUChile Associa-
tion Negotiations with Representatives of the European Civil Society, Business
Community and Academic Community, 12 October. http://europa.eu/com/
external_relations/mercosur/conf/index/htm.
European Commission (2002a) Overview: EUMERCOSUR Relationship. http:/
/europa.eu.intrelations/mercosur.
European Journal of International Relations 10(4)
622
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
European Commission (2002b) EUMERCOSUR: European Commission Adopts
Regional Programme in Support of Further MERCOSUR Integration, IP/
02/1376, 26 September. Brussels.
European Commission (2002c) II Conference with Representatives from the European
Civil Society, Business Community and Academic Community, Brussels, 12
February. http://europa.eu/com/external_relations/mercosur/conf/obj.htm.
European Commission (2003a) The EUs Relationship with Latin America: Over-
view, October. http://europa.eu/com/external_relations/la/index/htm.
European Commission (2003b) The EUs Relation with Mercosur, September. http:/
/europa.eu/com/external_relations/mercosur/intro/index/htm.
European Commission (2003c) EUMercosur: Trade Ministerial Agrees Road Map
for Final Phase of Free Trade Negotiations, November, Brussels. http://euro-
pa.eu/com/external_relations/mercosur/intro/ip03_1544.htm.
European Commission (2004) The EU Development Policy: Statement by the Council
and the Commission, January, Brussels. http://europa.eu/com/development/
body/legislation.docs/council_statement.
Fischer, R. (ed.) (2001) Latin America and the Global Economy: Export Trade and
the Threat of Protectionism. Basingstoke: Macmillan.
Framework Cooperation Agreement Between the EU and MERCOSUR (1996)
http://europa.eu.int/mercosur/coop/text/96.htm.
Freres, C. (2000) The European Union as Global Civil Power: Development
Cooperation in EULatin American Relations, Journal of Interamerican Studies
and World Affairs 42(2): 6386.
Freres, C. (2002) The Role of Civil Society in the European Unions Development
Cooperation with Mercosur, in P. Giodano (ed.) An Integrated Approach to the
European UnionMERCOSUR Association, pp. 42136. Paris: Chaire MERCO-
SUR Publications, Cience-Po.
Gamble, A. and A. Payne (eds) (1996a) Regionalism and World Order. Basingstoke:
Macmillan.
Gamble, A. and A. Payne (1996b) Conclusion: The New Regionalism, in A.
Gamble and A. Payne (eds) Regionalism and World Order, pp. 24764.
Basingstoke: Macmillan.
Gilson, J. (2002) Asia Meets Europe: Inter-Regionalism and the AsiaEurope
Meeting. Cheltenham: Edward Elgar.
Grugel, J. (1996) Latin America and the Remaking of the Americas, in A. Gamble
and A. Payne (eds) Regionalism and World Order, pp. 13168. Basingstoke:
Macmillan.
Grugel, J. (2000) Romancing Civil Society: European NGOs in Latin America,
Journal of Interamerican Studies and World Affairs 42(2): 87108.
Grugel, J. and W. Hout (eds) (1999) Regionalism Across the NorthSouth Divide.
London: Routledge.
GTAmericas (2002) Spanish Banks Dwarf US Competition in Region, 26 July.
http://www.gtamericas.com/country/spain.
Guinazu, M.C. (2002) La Sociedad Civil en el Proceso de Integracion Hemisferica,
mimeo. Buenos Aires: FLACSO Argentina.
Grugel: New Regionalism and Modes of Governance
623
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Hakim, P. (2003) Its up to the US Whether FTAA Moves Forward, The Miami
Herald, 16 November.
Hill, C. (2003) What Is To Be Done? Foreign Policy as a Site for Action,
International Affairs 79(2): 23353.
Holland, M. (2002) The European Union and the Third World. London: Palgrave.
Hurrell, A. (1994) Regionalism in the Americas, in A. Lowenthal and G. Treverton
(eds) Latin America in a New World, pp. 17190. Boulder, CO: Westview
Press.
Inter-American Development Bank (2002) Integration and Trade in the Americas:
Special Issue on Latin American and Caribbean Economic Relations with the
European Union. Washington, DC: IDB.
IRELA (1999) Las Perspectivas de un Acuerdo de Libre Comercio UE-MERCOSUR
y las Opciones para la Politica de EEUU. Madrid: IRELA.
Jayasuriya, K. (2003) Embedded Mercantilism and Open Regionalism: The Crisis of
a Regional Political Project, Third World Quarterly 24(2): 33955.
Kaltenthaler, K. and F.O. Mora (2002) Explaining Latin American Economic
Integration: The Case of MERCOSUR, Review of International Political
Economy 9(1): 7197.
Klom, A. (2003) Mercosur and Brazil: A European perspective, International
Affairs 79(2): 35168.
Kohler-Koch, B. and R. Eising (eds) (1999) The Transformation of Governance in the
European Union. London: Routledge.
Lafer, C. (2002) La identidad international de Brasil. Buenos Aires: Fondo de
Cultural Economica.
Lawrence, R.Z. (2003) Regionalism, Multilateralism and Deeper Integration:
Changing Paradigms for Developing Countries, in C. Roe Goddard, P. Cronin
and K. Dash (eds) International Political Economy: StateMarket Relations in a
Changing Global Order, pp. 391412. Basingstoke: Palgrave.
Lister, M. (1997) The European Union and the South: Relations with Developing
Countries. London: Routledge and UACES.
Lister, M. (2003) EU Development Policymaking in a Globalizing World, EADI
Conference EU in the World, Brussels, 19 May.
Manners, I. (1998) The International Identity of the EU, Journal of European
Integration 21: 23843.
Manners, I. (2002) Normative Power Europe: A Contradiction in Terms? Journal
of Common Market Studies 42(2): 35961.
Marchand, M., M. Boas and T. Shaw (1999) The Political Economy of New
Regionalisms, Third World Quarterly 20(5): 897910.
Marquis, C. (2004) Bush to Face a Newly Assertive Latin America, The Washington
Post, 10 January.
Maxwell, S. and P. Engel (2003) European Development Cooperation to 2010,
Working Paper 219. Overseas Development Institute.
Maxwell, S. and R. Riddell (1998) Conditionality or Contract: Perspectives on
Partnership for Development, Journal of International Development 10, March
April: 25768.
European Journal of International Relations 10(4)
624
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Mercopress (2003) Brazilian Ofcials: Wed Rather Negotiate with EU than the
U.S., 28 October. http://www.mercopress.com/detalle.asp?NUM 2775.
MercosurEU Business Forum (2002) Madrid Declaration, May, Madrid.
Murphy, C. (2000) Global Governance: Poorly Done and Poorly Understood,
International Affairs 76(4): 789803.
Nye, J. (2003) American Power Before and After 11 September: Dizzy with
Success? International Affairs 78(2): 272.
OXFAM (undated) Trade EU Association Agreements with Latin America. http:/
/www.Oxfam.org.uk/what_we_do/issues/trade/tradelatin/htm.
Patten, C. (2000) Speech to the EUMercosur Biregional Negotiations Committee,
Brasilia, 7 November. http://europa.eu.int/news/patten/speech 00422htm.
Patten, C. (2001) Luncheon speech at the Rio Group Ministerial, Chile, 28 March.
http://europa.eu.int/news/patten/speech01150htm.
Patten, C. (2002) Forward to the EU-LAC Madrid Summit, Madrid, 1718 May.
http://www.europa.eu/int/comm/world/lac.
Payne, A. (1996) The United States and its Enterprise for the Americas, in A.
Gamble and A. Payne (eds) Regionalism and World Order, pp. 93130.
Basingstoke: Macmillan.
Payne, A. (2000) Globalization and Modes of Regionalist Governance, in J. Pierre
(ed.) Debating Governance: Authority, Steering and Democracy, pp. 20118.
Oxford: Oxford University Press.
Phillips, N. (2003a) Hemispheric Integration and Subregionalism in the Americas,
International Affairs 79(2): 32749.
Phillips, N. (2003b) The Rise and Fall of Open Regionalism? Comparative
Reections on Regional Governance in the Southern Cone of Latin America,
Third World Quarterly 24(2): 21734.
Phillips, N. (2004a) The New Politics of Trade in the Americas, in W. Grant and D.
Kelly (eds) The Politics of International Trade: Actors, Issues, Regions. Basingstoke:
Palgrave.
Phillips, N. (2004b) Multilateralism, US Trade Strategy, the Free Trade Area of the
Americas and the Governance of World Trade. Paper presented to the Royal
Institute of International Affairs, Chatham House, London, 8 January.
Price, J. and F. Sztabinski (2003) Will Brazil Join the FTAA? http://tendencias.
infoamericas.com/article_archive/2003/043/043_regional_trends.htm.
Puentes (2003) Una ALCA con puntos suspensivos. Diario de Miami Informacion
sobre la VIII Reunion Ministerial del ALCA, 20 November.
Sanchez Bajo, C. (1999) The European Union and MERCOSUR: A Case of Inter-
Regionalism, Third World Quarterly 20(5): 92741.
Schultz, M., F. Soderbaum and J. Ojendal (2001) A Framework for Understanding
Regionalism, in M. Schultz, F. Soderbaum and J. Ojendal (eds) Regionalization
in a Globalizing World, pp. 121. London: Zed Books.
Seventh Meeting of the EUMERCOSUR Bi-regional Negotiations Committee
(2002) Final Conclusions. Buenos Aires, 711 April. http://europa.eu.int.mercosur/
ass-neg-text.
Grugel: New Regionalism and Modes of Governance
625
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
Smith, P. (2000) Talons of the Eagle: Dynamics of USLatin American Relations, 2nd
edn. Oxford: Oxford University Press.
Tacone, J.J. and U. Noguiera (2001) Report MERCOSUR, 20002001. Buenos
Aires: Institute for the Integration of Latin America and the Caribbean.
Teichman, J. (2001) The Politics of Freeing Markets in Latin America. Chapel Hill:
University of North Carolina Press.
Tuckman, J. (2004) Latin America Squares Up to US, The Guardian, 12
January.
Tussie, D. and M. Botto (2002) La agenda del ALCA: patrones nacionales y
tendencias regionales, in Anuario Social y Politico de America Latina y el Caribe
2002, pp. 7383. Buenos Aires: Nueva Sociedad and FLACSO.
Whitman, R. (1998) From Civilian Power to Superpower? The International Identity
of the European Union. Basingstoke: Macmillan.
Wyatt-Walter, A. (1995) Globalisation and World Economic Order, in L. Fawcett
and A. Hurrell (eds) Regionalism in World Politics. Oxford: Oxford University
Press.
European Journal of International Relations 10(4)
626
or unauthorized distribution.
2004 European Consortium for Political Research, SAGE Publications. All rights reserved. Not for commercial use
at Koc University on January 24, 2008 http://ejt.sagepub.com Downloaded from
The Quarterly Review of Economics and Finance
43 (2003) 863892
Mexico under NAFTA: a critical assessment
Miguel D. Ramirez

Trinity College, Hartford, CT, USA

Received 16 May 2003; accepted 16 May 2003
Abstract
This paper assesses the evolution and performance of several key economic and social variables in
Mexico following the passage of NAFTA. The evidence shows that under NAFTAMexican trade and for-
eign direct investment inows have risen at rapid rates, particularly in the export-oriented assembly-line
sector. However, the evidence also suggests that it is hard to disentangle the effects of NAFTA from the
other non-NAFTA factors such as demand in the U.S. in explaining the dynamism of the Mexican export
sector (and economy). This has been attested by howthe Mexican economy has been dragged into a severe
recession over the past two years as a result of the relatively mild downturn in the U.S. business cycle.
Insofar as employment growth, real wages in manufacturing, and productivity performance is con-
cerned, the evidence presented indicates that the record has been lackluster at best and disastrous at
worst. Manufacturing employment fell dramatically after the peso crisis, and remains stagnant. Real
wages have plunged since the peso crisis and have yet to recover levels attained in the mid-1980s. In
terms of productivity performance, no strong conclusions can be reached given the conicting estimates
in the extant literature. At best, the data show that productivity rose at healthy rates in the tradeable
sector, but stagnated in the non-tradeable sector.
Finally, the paper presents evidence which shows that both the functional and size distribution of
income have become more skewed during the period of trade and investment liberalization (JEL040,054).
2003 Published by Board of Trustees of the University of Illinois.
1. Introduction
The North American Free Trade Agreement (NAFTA) has been in effect now for almost 10
years, and although it will not be fully phased in until the year 2009, it has already been associ-
ated with signicant and long-lasting effects on economic growth, trade and investment ows,

Tel.: +1-217-333-8388.
E-mail address: ramirez@uiuc.edu (M.D. Ramirez).
1062-9769/$ see front matter 2003 Published by Board of Trustees of the University of Illinois.
doi:10.1016/S1062-9769(03)00052-8
864 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
employment patterns, wages and salaries, environmental standards, and labor law throughout
North America, and particularly Mexico.
The debate that raged before its ratication by the U.S. Congress in November 1993 centered
on a number of economic, social, and political issues. Proponents of NAFTAargued that it would
generate economic growth and increase the volume and quality of investment ows, create a
signicant number of well-paying jobs in export-related industries throughout the region, and
increase the availability of relatively inexpensive consumer goods to all markets.
Opponents of the treaty, made up of U.S., Canadian, and some Mexican unions, along with
small and medium-sized businesses, academics, environmentalists and human rights advocates,
argued that a badly-conceived free trade agreement would lead to the widespread elimina-
tion of jobs in the U.S. auto and textile industries, Canadian manufacturing, and in Mexican
peasant-based agriculture and small and medium-sized businesses. In addition, these critics
claimed that NAFTA would further erode labor and environmental standards in the signatory
countries and reinforce Mexicos and Canadas dependent economic position vis-a-vis the
U.S.
Sufce it to say that evaluating the economic and social impact of NAFTA on the Mexican
economy is extremely difcult in viewof its phased implementation, the overpowering effect of
the U.S. business cycle, the inherent difculty of disentangling the effects of NAFTAfromother
non-NAFTA factors when dealing with issues related to economic efciency and distribution,
and last but not least, the treatys near disastrous debut. It will be recalled that NAFTAs
implementation during 1994 coincided with a series of politically explosive events and an
unexpected economic crisis that would shatter Mexicos facade of modernity, and test the
Institutional Revolutionary Partys (PRI) hold on power in more than 60 years. Beginning with
the Zapatista uprising on Newyears day 1994, followed by the assassination of the countrys de
facto president, Luis Donaldo Colosio, on March 23, 1994, and then continued by sensational
revelations later that year that implicated the brother of outgoing President Carlos Salinas de
Gortari in a conspiracy to assassinate the Secretary General of the ruling PRI, only to culminate
with the devastating peso crisis of 19941995 that led to a precipitous drop in real GDP of 6.2%
in 1995 (almost 8% in per capita terms)the worst drop in economic activity since 1932!
In view of the inherently complex and broad range of the issues involved, this paper will
focus primarily on the performance of trade and investment ows, employment, wages, and
average productivity levels under NAFTA, although non-economic factors such labor standards
in the Maquiladora sector and the accords impact on subsistence agriculture will be addressed
as well. In so doing, it will attempt to go beyond the rhetoric of the claims and counter-claims
of NAFTA proponents and opponents alike, and investigate those elements in each view that
help us understand the accords impact on Mexico.
The layout of the paper is as follows: Section 2 outlines some of the key provisions of NAFTA
and reviews some of the extant literature on the economic impact of NAFTA on Mexico and
the U.S. Section 3 examines the evolution and performance of Mexican exports and investment
ows under the accord, and tries to determine whether the impact of NAFTA is overpowered
by other non-NAFTA factors. It also presents estimates from an error correction model (ECM)
designed to capture the effects of the liberalization of foreign investment rules on foreign direct
investment ows. Section 4 provides a critical assessment of the performance of employment
growth, average real wages, average labor productivity, and labor standards under NAFTA.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 865
It also examines how Mexican subsistence agriculture has fared under the accord. Section 5
summarizes the papers major ndings, and offers a partial evaluation of the NAFTA.
2. Overview of NAFTA
In February 1991, the U.S., Mexico, and Canada agreed to begin negotiating a free trade
agreement that would create, at the time, the largest trading bloc in the world with a combined
GDPof US$ 7.0 trillion (a full US$ 225 billion greater than that of the European Economic Com-
munity) and 366 million consumers.
1
The accord sought to eliminate all trade and investment
barriers and secure equal treatment for foreign investors in energy, telecommunications, bank-
ing and nancial services, and procurement. In order to formalize the process, the governments
of the NAFTA nations also agreed to create a state-of-the-art dispute settlement mechanism.
Formal negotiations began in June 1991, and on August 12, 1992, it was announced that the
three nations had endorsed NAFTA. Because of the politically sensitive nature of the accord, a
vote on NAFTA was delayed until after the 1992 U.S. elections and then, following an intense
and ercely fought political battle that pitted a democratic president against a majority of his
own party and organized labor (rarely, if ever seen over a trade agreement in this country in
the post-World War II period), it was passed by both the House and Senate in November 1993.
It was enacted into law on January 1, 1994the very same day that the Zapatistas led by
their charismatic leader, Commandant Marcos, burst unexpectedly on the Mexican political
and social scene.
2.1. Benets of trade
The direct benets of the agreement stem from the nearly complete elimination of tariffs and
non-tariff barriers for most goods between the trading partners, with a phased elimination of
1015 years for vulnerable industries in the U.S. such as textiles and apparel and subsistence
agriculture in Mexico. At the time the agreement went into effect, U.S. tariffs on Mexican
imports were already quite low, averaging 4%, while Mexican tariffs hovered around 11%. By
the end of the decade, Mexican tariffs had fallen to 2% and quotas, import licenses, and other
non-tariff barriers had been eliminated (see Pastor, 2001).
2
NAFTA was the rst treaty between developed countries and a less developed country and it
was anticipated that Mexico would benet through expanded trade and employment opportuni-
ties with a large and growing market (85% of Mexican imports come from the U.S. and close to
90%of its exports are destined for the U.S.).
3
More importantly, Mexico was expected to benet
from greater inows of foreign direct investment into the assembly-line industry, energy, bank-
ing and nance as a result of its abolition of foreign investment rules and regulations. The U.S.
economy, on the other hand, was not expected to benet very much in terms of output and em-
ployment effects because of the relatively small size of the Mexican economy. For example, at
the time, most econometric models estimated that in the long run real income in the U.S. would
rise only between 0.11%and 0.25%(overall employment and wage effects were also expected to
be quite small). Insofar as Mexico is concerned, the positive effects of NAFTA on employment
and income were expected to be relatively largeas much as a 6.6% increase in employment
866 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
and 12% increase in real income or even more by the end of NAFTAs phased implementation
(see Lustig, Bosworth, & Lawrence, 1992; Bursher, Robinson, & Thierfelder, 2001).
It is also important to mention that several studies at the time, in their eagerness to support
or derail the agreement, made a variety of mercantilist arguments that focused primarily on
the employment and trade balance effects of NAFTA. For example, a study by the Institute for
International Economics in Washington, DC, estimated that a net 171,000 jobs would be created
under NAFTA and that US$ 1215 billion a year would be eventually added to total American
and Mexican GDP. Other studies such as the one by the Washington-based think-tank, the Eco-
nomic Strategy Institute, predicted that, on a net basis, as many as 636,000 jobs could be lost
as a result of larger imports from Mexico, and a greater exodus of U.S. runaway rms to that
country over the next 10 years. More recently, Haar and Garrastazu (2001) cites a study by Scott
(1999) which reports that, fromthe time the [NAFTA] took effect in 1994 through 1998, growth
in the net export decit with Mexico and Canada has destroyed 440,172 [U.S.] jobs (p. 1).
Most economists dismiss these arguments because the case for free trade is based on the
efciency gains that are generated by countries specializing in those goods and services in
which they have a comparative advantage. This means that an overall negative or positive trade
balance is irrelevant to assessing the effectiveness of the NAFTA. The direction of the overall
trade balance is a macro phenomenon that is determined by the aggregate spending decisions
of savers and investors. In other words, if the public and private sectors of a country spend,
respectively, in excess of domestically generated tax revenues and savings, then they must
nance their excess spending via a capital account surplus or equivalently a current account
decit. Froman empirical standpoint, the weakness of the mercantilist argument is also revealed
by the fact that changes in the overall U.S. trade balance since the passage of NAFTA have
completely overwhelmed changes in bilateral trade balances among the NAFTA partners (see
Bursher et al., 2001).
Insofar as employment effects are concerned, recent studies have found that the job loss
impact of NAFTA for the U.S. has been relatively small. For example, a recent and widely
cited partial equilibrium model that analyzes the impact of Mexican imports on U.S. aggregate
demand and employment nds that . . . the total estimated potential job impact in the United
States from 1990 to 1997 due to imports from Mexico at 300,000, or an average of 37,000
jobs per year lost due to increased trade (see Bursher et al., 2001, p. 130). Another study
cited by Haar and Garrastazu (2001) nds that during the last ve and a half years 259,618
U.S. workers were certied as potentially suffering NAFTA job losses (p. 8). To put these
number into perspective, it should be noted that during the period in question the U.S. economy
generated, on average, over 200,000 jobs per month.
4
Nevertheless, the idea that the trade balance is primarily or exclusively determined by what
happens in nancial markets introduces an important (and overlooked) channel for NAFTA
to have contributed to the ballooning Mexican trade (and current account) decit in the early
to mid-1990s. In fact, critics of NAFTA point to the 19941995 peso crisis as proof positive
that the agreement itself was partly responsible for the nancial debacle and sharp economic
contraction of 1995. The argument is based on the Metzlerian wealth effect on savings, viz.,
that, in the short-to-medium run an increase in expected wealth and income leads to a decrease
rather that an increase in national savings. In the heady days preceding the passage of NAFTA
there was the totally unrealistic belief that the adoption of market-oriented reforms would
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 867
pay off in a matter of a few quarters. Needless to say, the international banking community,
multilateral institutions, and Mexican and U.S. pundits fueled this irrational exuberance by
heaping praise on the Salinas de Gortari administration at every opportunity. Mexico was the
darling of international investors and could do no wrong. Few analysts stopped to reect on the
obvious fact that the reallocation of resources, the adoption of new technology and managerial
knowhownot to mention the reorganization of existing institutions to meet the challenges of
an open economyare processes that produce results only after a long gestation period.
5
Put
differently, NAFTA may have enabled Mexico to get its current prices right, but only at the
cost of introducing an inter-temporal distortion between present and future consumption for
which the country paid a terrible price.
6
Table 1 shows that the imbalance in the countrys private sector (measured by the gap between
its gross national savings and gross domestic investment) widened signicantly during the
19911994 period. The rapidly increasing indebtedness of Mexicos middle class consumers
and investorsand the drop in savingscan be attributed to the expectation, widespread in the
heady years of 1992 and 1993, that passage of the NAFTAwould catapult the Mexican economy
into rst-world status, thereby raising the countrys future wealth and income. However, as
happened in Chile during 19781981, Table 1 reveals that Mexicos inter-temporal substitution
of present for future consumption was reected in a dramatic, and ultimately unsustainable,
increase in its current account decit (as a percentage of GDP), and a concomitant drop in the
national savings rate despite a signicant rise in the countrys real interest rate during the last
three years of the Salinas sexenio.
Supporters of NAFTA, however, contend that there was no direct link between NAFTA and
the peso crisis because the strains on the Mexican economy were widely anticipated by informed
observers. In other words, it was evident that unless Mexico devalued its peso in real terms by
at least 20% (and pursued supporting and credible scal and monetary policies), some kind of
crisis was imminenteven if the exact timing could not be foretold (see Dornbusch & Werner,
1994). Furthermore, they contend that, if anything, the agreement, by preventing a nationalist
and protectionist backlash, helped Mexico recover from the peso crisis more quickly than it
would have been able to do otherwise (refer to real GDP growth rate in Table 1).
What the counterfactual would have been is always hard to discern in an inexact science such
as economics, and small comfort to the millions of Mexicans who paid a very steep price under
the IMF-sponsored austerity program in terms of rising unemployment and underemployment,
plunging real wages, and lost investment opportunities (see Table 1).
7
However, there is no
question that one of the most important aspects of the accord was (and is) the credible signal
it sent to the world business community about the Mexican governments commitment to freer
markets. It certainly has made it extremely difcult for future Mexican presidents to revert to
populist programs when faced with economic and social crises. This outcome has been borne
out by, rst, the election of PRI and pro-NAFTA candidate Ernesto Zedillo (19942000) under
extremely difcult political circumstances and, more recently, that of conservative National Ac-
tion Party (PAN) candidate Vicente Fox (20002006)the latter a strong supporter in practice,
if not in rhetoric, of neoliberal policies in general, and NAFTA in particular.
Turning briey to Canada, NAFTA was not expected to have a dramatic impact because
Canada and the U.S. had already entered into a free trade agreement in 1989. Insofar as Mexico
is concerned, Canadas trade with Mexico was, and remains, relatively small. For example,
8
6
8
M
.
D
.
R
a
m
i
r
e
z
/
T
h
e
Q
u
a
r
t
e
r
l
y
R
e
v
i
e
w
o
f
E
c
o
n
o
m
i
c
s
a
n
d
F
i
n
a
n
c
e
4
3
(
2
0
0
3
)
8
6
3

8
9
2
Table 1
Mexico: selected economic indicator, 19902001
Item 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
a
Percent change
Real GDP 4.0 3.6 3.6 1.7 4.5 6.2 5.4 6.7 4.8 3.7 6.8 0.9
Real GDP per capita 1.7 1.4 0.4 1.9 0.8 7.8 3.6 5.0 3.3 2.1 5.2 2.5
Consumer prices 30.0 18.8 11.9 8.0 7.1 52.1 28.0 15.7 18.6 12.3 9.5 6.4
Reel minimum wage 7.3 6.5 7.2 5.6 5.0 21.0 18.0 11.4 3.4 2.6
Open unemployment 2.7 2.7 2.8 3.4 3.9 6.4 5.5 3.7 3.2 2.5 2.2 3.0
Broad open unemployment
b
4.4 4.2 4.8 5.6 6.1 8.6 6.4 4.6 4.2 4.0
Underemployment
c
20.5 20.8 21.5 23.0 22.1 25.9 25.2 23.4 21.2 20.3
Percentage of GDP
Fiscal decit 3.5 1.3 1.0 0.2 0.1 0.0 0.0 0.7 1.2 1.3
Gomestic investment 18.6 19.5 22.0 20.5 21.6 16.2 18.0 19.5 21.3 22.0 23.0 21.0
Domestic savings 15.5 14.1 13.8 13.0 12.3 15.7 17.3 17.6 17.5 17.2
Current account balance 3.2 4.8 6.8 6.4 8.1 0.6 0.7 1.9 3.8 3.4 3.1 3.0
Public external debt 31.7 26.1 31.0 31.1 29.8 59.3 49.8 38.2 38.8
Exports (US$ billion) 40.7 42.7 46.2 51.8 60.9 79.5 96.0 121.8 129.4 136.3 166.4 158.5
Foreign investment (US$ billion) 3.7 3.6 3.6 4.9 10.2 7.6 9.2 12.8 11.3 12.1 13.2 24.5
Real effective exchange rate
(1990 = 100)
100.0 91.0 78.5 72.9 75.2 125.6 129.0 115.2 115.8 105.0
Source: Banco de Mexico, The Mexican Economy (19951999); and ECLAC, various reports.
a
Preliminary data.
b
Broad concept includes those who are openly unemployed plus those discouraged workers who stopped looking for work.
c
Measures the percentage of the economically active population that is unemployed or is employed for less than 35 h per week.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 869
Bursher et al. (2001) reports that Canadas exports to Mexico as a share of total Canadian
exports amounted to a mere 0.4%in 1994 and remained at that level in 1999. Likewise, Canadian
imports from Mexico as a percent of total Canadian imports rose from 2.1% in 1994 to only
2.9% by dawn of the new millennium. In fact, most of Canadas benets came in the form of
safeguards: maintaining its status quo in international trade relations; i.e., no loss of its current
trade preferences in the U.S., equal access to the Mexican market, and national treatment for
its investors in Mexico and the U.S.
2.2. Costs of trade
While NAFTA benets certain economic and nancial groups in each nation, it is not a
winwin situation for everybody. It produces both winners and losers among industries, oc-
cupations, and regions of the U.S. and Mexico. After all, the distributional impact of freer
trade on wages, prots, and employment has been a key source of the controversy surround-
ing the long-standing debate on the relative costs and benets of free trade (see Samuelson,
1948). Workers, peasants, and employers who are harmed by imports from the U.S. will not be
consoled by the economists assertion that, on balance (and in the long run), there are overall
gains from trade because of rising exports, investment, and the creation of jobs elsewhere in
the economy. Unless the winners compensate the losers so that they are just as well off as they
were before trade, which rarely, if ever, happens (particularly in LDCs such as Mexico with
non-existent social safety nets), freer trade results in a sub-optimal outcome where economic
and social costs are concentrated in certain segments of society.
8
More often than not, these are the most vulnerable in terms of regional location, educational
background, mobility, and job-related skills.
9
In the U.S. it has led to the widespread elimi-
nation of jobs in industry groups such as textiles and garment, footwear and leather products,
certain manufactured goods, specialty steel, sugar, and citrus growers. In this regard, Haar and
Garrastazu (2001) cites several studies that show that employment effects on men, women,
and minority groups have all been negative, especially in manufacturing jobs that pay relatively
high wages (p. 2). In Mexico, small and medium-sized businesses have been adversely affected
along with non-Maquiladora manufacturing, domestic banking and nancial services, some ba-
sic petrochemicals and mining, and last but not least, small growers of basic grains such as corn
who, as discussed in the last section, may be wiped out if heavily-subsidized U.S. and Cana-
dian agricultural products are allowed to enter Mexico freely. Of course, any real assessment
of the welfare costs of NAFTAan undertaking beyond the scope of this papermust also
deal with issues such as worker displacement and retraining, domestic content requirements,
government procurement, the narcotics trade, and the impact of free trade on migratory ows
and the environment (see Pastor, 2001).
3. The evolution and performance of trade, investment, and subsistence agriculture
under NAFTA
Market size and demand considerations constitute an important factor in stimulating trade
and foreign investment. NAFTA, by creating the worlds largest free trade area, has accelerated
870 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
the economic integration of the U.S. and Mexican economies. The immediate lowering of
average U.S. tariffs on Mexican goods, particularly imported manufactured goods (U.S. tariffs
fell from 5.8% to just 1%), helped boost Mexican total exports from US$ 51.8 billion in 1993
to US$ 166.4 in 2000, before falling to US$ 158.5 in 2001 as a result of the U.S. recession
(see Table 1). This dramatic increase in Mexican exports contrasts sharply with the much
slower average annual growth rate in total exports of 13% that the country recorded during the
19861993 period. The transformation of Mexico into a dynamic regional exporter (the tenth
largest exporter in the world) is also evidenced by the rapidly rising proportion of Mexicos
GDP devoted to trade. For example, Mexicos total trade (the sum of exports and imports) as a
percentage of GDP rose from 35% in 1993 to over 60% in 1999, and exports alone rose from
15% to 30% (see Banco de Mexico, 1999).
The impact of NAFTA and the peso crash of 19941995 also helps explain part of the
burgeoning expansion of the Maquiladora (assembly-line) sector of the Mexican economy.
The number of Maquilas has jumped from 2000 in 1994 to 3,333 in 1999, and are mostly
located in northern border states such as Baja California (1131), Chihuahua (403), and Sonora
(262). Firms in this sector are mostly owned by U.S. rms with well-known names such as
American Home Products, Beatrice Foods, Caterpillar, Eastman Kodak, Frito-Lay, Ford, GM,
IBM, Levi-Strauss, Mattel, Motorola, Pepsico, Siemans, Sony, Wrangler, and Maidenform,
to name just a few. They import capital inputs and parts duty-free from the U.S. in order to
assemble manufactured goods for re-export that range all the way from low-end goods such as
textiles and apparel, toys, processed foods, and leather goods to sophisticated goods such as
autos and engine parts, computer equipment, industrial machinery, and TV sets. Table 2 shows
that since the passage of NAFTA the proportion of Maquiladora exports to non-Maquiladora
exports rose from 39.1% in 1995 to 46.2% in 1999, but as shown in the Table, this upward trend
began in earnest well before NAFTA was enacted into law (with Mexicos formal admission to
the GATT in 1986).
Notwithstanding the impressive growth of Maquiladoras since the passage of NAFTA, they
continue to have a relatively small impact on the Mexican economy because they thrive upon
very low real wages, minimal labor standards, sell very little of their output in Mexico, and
Table 2
Mexico: Maquila exports as a percentage of total exports, 19801999
a
Year Percentage Year Percentage
1980 14.0 1991 37.1
1981 13.8 1992 40.4
1982 11.7 1993 42.1
1983 14.0 1994 43.1
1984 16.9 1995 39.1
1985 19.0 1996 38.5
1986 25.9 1997 40.9
1987 25.7 1998 45.1
1988 33.1 1999 46.2
Source: Banco de Mexico, http://www.banxico.org.mx.
a
Both Maquila exports and total exports are FOB values, and represent the gross production value.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 871
buy no more than 3% of their materials, parts and components from Mexican suppliers (see
Cypher, 2001; Cross Border Business Associates, 1999). In addition, although their contribution
to Mexican GDP and employment has grown, respectively, from 2% and 1.4% in 1993 to 6%
and 3.4% in 1999, they remain a highly disarticulated sector from the rest of the Mexican
economy and highly dependent and susceptible to the dynamism of industrial production in the
U.S.
10
At this juncture, it is important to observe that it is very difcult to disentangle the effects
of NAFTA from other non-NAFTA factors. For example, how much of the increase in Mex-
ican exports can be attributed to NAFTA-induced tariff reductions and/or to the massive real
devaluation of the peso in 19941995 which rendered Mexican goods much cheaper to U.S.
consumers? Or, for that matter, is the rapid increase in total Mexican exports more the effect of
the unprecedented expansion of the U.S. economy (the income effect) during the 19942000
period? After all, even before NAFTA went into effect, as a result of the opening up of the
Mexican economy following its formal admission to the GATT on July 25, 1986, a large pro-
portion of Mexican exports (imports) were destined to (came from) the U.S. market. In other
words, is Mexicos increased integration with the rest of the world (globalization) the creature
of NAFTA or is NAFTA the creature of Mexicos adoption of neoliberal policies following the
collapse of the import-substitution model (ISI) model in 1982?
One study that tries to isolate the effect of the devaluation of the Mexican peso from the
NAFTA is by Gould (1998). On the basis of a monthly bilateral trade model that spans the
period from January 1980 to January 1996, he reports that, on average, NAFTAs contribution
to the growth of U.S. exports to Mexico was 7 percentage points higher per year, while the
growth of Mexican exports to the U.S. is only 2 percentage points higher per year with NAFTA
(pp. 78). He also estimates what would have happened to U.S.Mexico trade had the peso
crisis not happened. His model suggests that exports from the U.S. to Mexico would have risen
22% without the crisis, rather than the 11% drop that took place with the crisis. On the other
hand, U.S. imports from Mexico (Mexican exports) were not signicantly affected by the peso
crisis (p. 9). He attributes the disparity in the results to the fact that the economic depression
generated by the massive peso devaluation had a devastating effect on the purchasing power of
the average Mexican via both substitution and income effects (see Table 1), while it had little,
if any, perceptible (negative) effect on U.S. aggregate income.
In a follow-up study undertaken in 1998, Gould recalculates NAFTAs effect on U.S-Mexican
bilateral trade based on a gravity model that uses quarterly data for the 19801996 period.
He now nds a more powerful effect, with NAFTA contributing, on average, an additional
16.3 percentage points per year to the growth of U.S. exports to Mexico and 16.2 percentage
points per year to the growth of Mexican exports to the United States. However, he is quick to
qualify his estimates for U.S. imports (Mexican exports) by noting that NAFTAs statistical
signicance for U.S. imports from Mexico is at best marginal. The 90% condence interval
lines shows that we cannot exclude the possibility that trade without NAFTA would have been
different fromtrade with NAFTA (p. 16). He attributes the larger effect found in the more recent
study to the positive effect that NAFTA has had on private-sector expectations by locking-in
neoliberal policies which, in turn, have acted as a catalyst for foreign direct investment in
export-oriented industries such as autos, computer equipment, industrial machinery, electronic
goods, and textiles and apparel products.
872 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
Similarly, Krueger (1999), on the basis of annual data from 1980 to 1998, reports that
non-NAFTA factors such as the peso devaluation and the prior liberalization of the Mexican
economy under Miguel de la Madrid (19821988) appear to dominate whatever effects NAFTA
may have had on trade patterns to date. She also reports that the Mexican export categories
that grew rapidly to the United States were the very same ones that grew rapidly with the rest
of the world. On the basis of this nding, she makes the important observation that the opening
of the Mexican economy since 1986 seems to have generated more trade creation than trade
diversion.
One last piece of empirical evidence that buttresses the notion that NAFTA is more the ef-
fect of an on-going process of globalization of trade and investment, rather than its cause, has
been provided by Gruben (2001) in a recent paper. He nds that, contrary to the widespread
belief that NAFTA has fueled the spectacular growth of production and employment in the
Maquiladora industry, it is non-NAFTA factors such as . . . demand factors (as expressed by
changes in the U.S. industrial index) and in supply/cost factors (as expressed by changes in
the ratios of Mexican to U.S. manufacturing wages and to manufacturing wages in four Asian
countries) (p. 19)that made Maquiladora rms grow faster. His Maquiladora employment
equations, based on annual data beginning in 1975 and ending in 1999, suggests that U.S.
industrial production has a contemporaneous positive and highly signicant effect, while the
one year-lag of the MexicoU.S. wage variable is, as expected, negative and signicant. Sur-
prisingly, the NAFTA dummy variable is found to have a negative and insignicant coefcient.
The results suggest that Maquiladora rms respond quickly to changes in U.S. demand, while
the employment response to changes in the wage ratio is delayed by one to two years because
Maquiladora operators . . . wait to see if the wage shocks are going to be permanent (p. 19).
Finally, it should be noted that Grubens estimates are robust to various specications, cor-
rected for collinearity via the principal components procedure, and they address the possible
simultaneity problem that arises when employment and wages are jointly determined.
11
Further evidence that non-NAFTAfactors have played a more important role in the dynamism
of the Mexican export sector (and economy)and, also, validating Grubens estimates above
is evidenced by how Mexico has been dragged into a severe recession by the faltering U.S.
economy in the past two years. Table 1 shows that with the onset of the recession in the United
States in 2001, Mexican real GDP has fallen close to 1% (or 2.5% in per capita terms) and
Mexican exports to the United States have dropped by 4.9% in 2001, which stands in sharp
contrast to the cumulative increase of almost 49% recorded during the previous three years.
Not surprisingly, the slowdown in the U.S. has led to hundreds of plant closings in export-
related industries (including the once booming Maquiladora sector) and the loss of hundreds of
thousands of jobs. For example, Orrenius and Berman (2002) report that as of January 2002,
240,000 Maquiladora workers had lost their jobs in the previous year. This represents a loss of
19%of total Maquiladora employment in just one year (p. 8). More ominously, the authors note
that Maquiladora operators (mostly U.S.-based TNCs) are taking advantage of the downturn
to relocate their operations to lower-wage countries in Central America and Asia, particularly
China. In a country where nearly half the population is poor by any measure (47 million in
2000) and where, to boot, there are no unemployment benets, it is more than likely that the
standard of living of millions of people has been adversely affected by the countrys recession
(see Table 1 which shows negative private real consumption during 2001). The outlook for
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 873
Mexican exports and employment in 20022003 is not encouraging either given the lackluster
performance of the U.S. economy in particular, and the world economy in general.
3.1. NAFTA and foreign investment
The impact of NAFTA on foreign investment ows in general, and FDI in particular, has
to be placed also within the larger liberalization, deregulation, and privatization strategy pur-
sued by Mexican governments, beginning with Miguel de La Madrid (19821988), and more
intensely and extensively, under the Salinas administration (19881994). This market-based,
outward-oriented strategy, accompanied by the (apparent) macroeconomic stability of the early
1990s, paved the way for the surge in investment ows that nanced the countrys growing
imbalance in the current account decit observed after 1990 (see Table 1). Other important
non-NAFTA factors that contributed to the surge in short-term money into emerging markets in
both Mexico and the rest of Latin America were the relatively low interest rates in the United
States and the economic recovery in the United States from the 1991 to 1992 recession (see
Ramirez, 1997).
Initially, a disproportionate share of these funds were not of the bolted down variety such as
FDI ows, but of the short-term or portfolio variety. In 1993, for example, Mexico received an
estimatedUS$17billioninforeigninvestment, of whichclose to70%went inthe stockmarket
not into direct investments in plants, machinery, and equipment (see Table 1). The bulk of these
funds were attracted by the overly generous terms being offered to investors by the privatization
of the banks and major state-owned enterprises, as well as by the issue of dollar-indexed
government debt (Tesobonos). Foreign (and domestic) investors were especially attracted to
these short-term debt instruments because, although payable in pesos, they transferred the
devaluation risk fromcreditors (investors) to the government or ultimate borrower. In exchange,
the government beneted from replacing maturing non-dollar indexed Cetes with Tesobonos
via an immediate drop in its interest servicing costs because the interest rate on Tesobonos
was between 6 and 8 percentage points below the rate on Cetes (see Whitt, 1996, p. 12). An
additional benet to the Mexican government stemmed from the enhanced credibility of its
commitment to the peg-precisely because it would not benet from a reduction in the real
value of its dollar-indexed debt, as it would in the case of the peso debt (ibid., p. 12.) In
the tumultuous year of 1994, Tesobonos de facto became the only mechanism available to the
Mexican government to attract funds or, more precisely, reassure nervous investors who might
otherwise transfer money out of the country. Again, Whitt (1996) observes that before the
[peso] crisis, most of Mexicos debt took the form of short-term, peso-denominated securities,
such as cetes . . . in December 1993about 75%of foreignholdings took this form. . . [However],
by November 1994, cetes had shrunk to only 25% of foreign holdings of Mexican government
securities; 70% was now in Tesobonos (p. 12).
In the wake of the near collapse of the Mexican economy following the peso devaluation of
19941995, long-term funds, in the form of FDI ows, have played a very important role in
nancing the subsequent recovery and growth of the Mexican economy (see Table 1).
12
Econ-
omy theory and empirical evidence suggests that the motivation for investment abroad arises
when the prot expectations from such investments exceed those from alternative uses of those
funds in the home country. The factors governing the decision to invest abroad are numerous
874 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
and diverse ranging fromthe general level of economic activity to anticipated tax and tariff poli-
cies, unit labor costs, and foreign investment laws. At the risk of some oversimplication, these
factors can be grouped into three broad categories: cost or supply considerationsinuencing
costs of production and distribution, market or demand considerations that inuence total sales
revenues (and therefore prots), and institutional factors, that affect the legal status of foreign
investors relative to domestic investors.
It is safe to say that the passage of NAFTA has played an important role in enhancing these
ows because it set in motion a series of institutional reforms that have fundamentally improved
the FDI environment in Mexico. More generally, the rapid increase of foreign direct investment
ows into Latin America during the decade of the 1980s and 1990s has been stimulated by
dramatic changes in the regions legalinstitutional environment associated with the imple-
mentation of liberalization, privatization, and deregulation programs. In general, there has been
a major liberalization in the restrictions governing the remittances of capital and prots, as well
as the introduction of new laws that grant TNCs essentially the same benets and responsibil-
ities as domestic rms (viz., national treatment). For example, in most countries there are no
restrictions on the repatriation of prots and dividends, corporate taxes have been reduced or
replaced by value-added taxes, and the need for prior authorization has been either eliminated
entirely or restricted to a few priority sectors such as oil in Mexico (see Ramirez, 2002).
In the Mexican case, it is readily apparent that the impetus for change in the governments
attitude and policy toward foreign investment in general, and FDI in particular, can be traced to
the countrys pressing need for funds following the credit squeeze generated by the onset and
aftermath of the August 1982 debt crisis. Major changes in the legal framework governing FDI
were rst introduced by the Miguel De La Madrid administration (19821988), and further
intensied by the neoliberal administration of Carlos Salinas de Gortari (19881994). For
example, under the De la Madrid administration several sectors that had been off limits to foreign
investors such as petrochemicals, mining, banking, and telecommunications were opened on a
selective basis and, in some instances, foreign investors were allowed a majority shareholding
position (see Cornelius, 1986; Ramirez, 1989).
FDI regulations were signicantly relaxed under the Salinas de Gortari administration dur-
ing 1989 when the government allowed 100% foreign participation with no prior approval for
investments valued under US$ 100 million (see ECLAC, 1998; Lustig et al., 1992). The immi-
nent vote on NAFTA in late 1993 was also instrumental in the enactment in March of that year
of the Mexican Investment Promotion and Foreign Investment Regulation Act which further
liberalized the entry of foreign investors into strategic sectors. ECLAC (2000) reports that
the legislation now in force permits foreign investors to participate in most economic sectors.
It reports that . . . of the 704 [sectors] listed in the Mexican Classication, 606 are fully open
to foreign capital, a share of up to 49% is permitted in 35 others, prior authorization from the
National Foreign Investment Commission (CNIE) is required in 37, and FDI participation is
not allowed in only 16 cases (p. 103). The aforementioned act also gave the Mexican govern-
ment additional discretionary powers to determine in which sectors or projects foreign investors
would be allowed to control majority interests. The passage of NAFTA in November of that
year locked in the more liberal provisions governing the rights of foreign investors.
Fig. 1 shows that the relaxation of FDI rules in 1989 and the commencement of NAFTA
negotiations in 1991 explains the rapid increase in FDI ows after 1991. The dramatic increase
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 875
Fig. 1. FDI inows to Mexico, 19902000.
in FDI ows to the country, however, takes place after the passage of NAFTA in 1993. In this
connection, my own empirical work (reported below), based on an ECM using annual data for
the 19561996 period, suggests that institutional variables such as the debt conversion program
(19861989), variable D2, and the liberalization of foreign investment rules from 1991 to 1994
(D1) had a positive and statistically signicant effect on FDI ows to Mexico, while economic
and political turmoil (D3) had a negative effect. To conserve space, the results of one of the EC
models estimated in this study is given as follows:
LFDI
t
= 0.65
(0.68)
+1.13 LGDP
t1
(2.01)

+0.28 LREX
t2
(2.15)

0.61EC
t1
(5.07)

+0.38D1
(3.18)

+0.48D2
(3.39)

0.35D3
(5.28)

Adj. R
2
= 0.74, S.E. = 0.23, F-statistic = 12.21

,
D.W. =1.85, Akaike criterion = 0.14, Schwarz criterion = 0.50
where denotes the difference operator, EC
t1
represents the lagged residual from the coin-
tegrating equation, and * denotes signicance at least at the 5% level. The ECM model also
suggests that a one-year lagged percentage increase in real GDP (a proxy for market size) has a
positive effect, while a two-year lagged percentage increase (depreciation) in the real exchange
rate (a proxy for labor and material costs) has a positive and statistically signicant effect. In
addition, the relative t and efciency of the ECMmodel is good and, as the theory predicts, the
lagged residual term (from the cointegrating equation) is negative and statistically signicant at
the 1% level. Finally, stability test indicate that the null hypothesis of no structural break could
not be rejected for the economic crises years 1976 (p-value: 0.124), 1982 (p-value: 0.166) and
1987 (p-value: 0.575).
13
The strength of FDI ows is further revealed by the fact that despite the serious economic
downturn in Mexico in 1995, and the associated Tequila effect which reduced FDI inows
in 1995 and 1996, they staged a remarkable recovery during the rest of the decade, easily
surpassing the pre-crisis levels. The chart shows that, on average, FDI ows more than tripled,
from US$ 3.3 billion in the 19851993 period to US$ 11.3 billion during 19942000.
From an economic standpoint, the importance of these inows is more fully appreciated by
focusing on their evolution relative to the countrys gross xed capital formation (see ECLAC,
876 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
Table 3A
Mexico and Chile: FDI ows as a percentage of gross xed capital formation, 19902000
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Chile 8.3 7.2 7.5 7.2 14.6 12.1 25.7 27.9 22.9 54.3
a
22.0
Mexico 5.6 8.7 7.1 7.1 16.4 16.6 15.7 16.3 2.8 13.2 12.9
Source: Computed from Banco de Mexico, http://www.banxico.org.mx; ECLAC (19961997, Table VIII. 4,
p. 126), and ECLAC (2002, Table A-5, p. 40; and Tables 12 and 15, pp. 760 and 763).
a
The unusually high gure for Chile is the result of a doubling of FDI inows and a steep drop in gross xed
capital formation in 1999.
2000, pp. 106111). Table 3A shows that throughout the decade of the 1990s, and particularly
after 1993, FDI ows are averaging 14.9% of Mexicos gross xed capital formation, but well
below those of Chilethe regions stellar performer (up until 1997 when it was hard hit by
the Asian crisis). Critics of FDI, however, contend that these ows, rather than contributing to
Mexicos nancing of capital formation, are, in fact, a drain on the country resources because
they generate substantial reverse ows in the form of remittances of prots and dividends to
the parent companies (see Cypher & Dietz, 1997).
One, admittedly, crude way of addressing this criticism is to measure the net contribution
of FDI to private capital formation by subtracting from these gross inows the repatriation of
prots and dividends to the parent companies.
14
Partial support for this contention can be gauged
from the following gures for Latin America. During the decade of the 1990s, remittances of
prots and dividends by Latin America and the Caribbean to the developed countries more than
tripled between 1990 and 1999, fromUS$ 7.0 billion to over US$ 25 billion (see ECLAC, 2002).
Not surprisingly, the lions share was accounted for by Argentina, Brazil, Chile, Colombia, and
Mexico.
In the case of Mexico the remittances of prots and dividends more than doubled between
1990 and 2000 from US$ 2.3 to US$ 5.2 billion. Relative to the inows of FDI during the
19902000period, Mexicos remittances of prots anddividends averaged55.6%. If we subtract
prots and dividends from FDI ows and express the net gure as a proportion of xed capital
formation, it is evident from Table 3B that the net contribution of FDI inows to gross xed
capital formation in Mexico is far less than that advertised in Table 3A. It is also evident that
during 19982000 FDIs contribution has declined relative to the 19941997 period. Finally,
it is important to note that the net contribution of FDI would be further reduced if we could
Table 3B
Mexico and Chile: FDI ows adjusted for the remittance of prots and dividends as a percentage of gross xed
capital formation, 19902000
Country 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Chile 4.6 1.7 2.1 0.8 6.0 10.9 16.7 17.4 17.8 43.8 8.1
Mexico 0.7 4.2 3.4 3.1 11.2 7.9 8.0 10.8 7.2 9.3 8.0
Source: Same as in Table 3A. Anegative value indicates that prots and dividend payments exceeded FDI inows
for that year, thereby diverting resources away from xed capital formation.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 877
accurately measure the amount of capital that leaves the region as a result of the widespread
practice of intra-rmtransfer pricing to avoid taxes and restrictions on the repatriation of prots
(see Plasschaert, 1994).
Froman economic standpoint, it is preferable to concentrate on the accumulated stock of FDI,
rather than the ow variable, because it is the former that ultimately determines the marginal
productivity of private capital (and labor). For Latin American as a whole the stock of FDI in
constant 1990 dollars rose from US$ 175.6 billion in 1990 to US$ 466.9 billion in 2000 (see
ECLAC, 2002, Table 12, p. 760). This represents more than a doubling in the stock of FDI of
these countries, an increase which is far greater than that of the entire lost decade of the 1980s.
Focusing on Mexico, its stock of FDI rose from US$ 37.1 billion 1990 and accelerated after
1993 (following the passage of NAFTA) reaching an impressive level of US$ 106.5 billion by
year-end 2000.
15
Endogenous growth theory suggests that if this accumulation of capital in the
form of FDI has generated substantial spillover benets in terms of innovation and managerial
knowhow, both of an indirect and direct nature, then the long-term positive contribution of this
surge in FDI during the decade of the 1990s cannot be adequately measured by focusing solely
on ow variables.
The sectoral destination of net FDI ows into Mexico during the decade of the 1990s is
shown in Table 4. FDI ows have been primarily channeled to greeneld investments in
the manufacturing sector, particularly in branches with a strong participation by TNCs and
with investments oriented towards exports such as those of the Maquiladora industry. Table 4
Table 4
Sectorial distribution of FDI ows in Mexico, 19851999 (millions of dollars)
Year Total Industry
a
Services Commerce Mining Agriculture
1985 1,729.0 1,165.8 453.3 109.5 18.0 0.4
1986 2,424.2 1,918.9 323.1 151.2 30.8 0.2
1987 3,877.2 2,400.5 1,433.9 21.2 48.8 15.2
1988 3,157.1 1,020.0 1,877.4 246.8 24.9 12.0
1989 2,499.7 982.3 1,102.3 386.3 9.5 19.3
1990 3,722.4 1,192.9 2,203.1 171.4 93.9 61.1
1991 3,565.0 963.6 2,138.0 387.5 31.0 44.9
1992 3,599.6 1,100.8 1,700.0 750.9 8.6 39.3
1993 4,900.7 2,320.5 1,730.7 759.9 55.1 34.5
1994 10,158.8 5,878.9 2,929.5 1,239.6 102.9 7.9
1995 7,613.3 4,294.0 2,307.9 923.5 79.0 8.9
1996 9,186.1 5,236.1 2,939.6 826.7 91.8 45.9
1997 12,831.0 7,826.9 3,207.8 1,549.7 108.4 138.3
1998 11,311.0 6,809.2 2,827.8 1,357.3 203.6 113.1
1999 12,100.0 7,296.3 3,025.0 1,331.0 242.0 205.7
Source: Instituto Nacional de Estadistica, Geograa e Informatica (INEGI), Anuano Estadistico de los Estados
Unidos Mexicanos. Aguascalientes, Mexico: INEGI, 1998, Table 17.23, p. 500; and Economic Commission for
Latin America and the Caribbean (ECLAC), Foreign Investment in Latin America and the Caribbean, 1999 Report.
Santiago, Chile: United Nations, 2000, pp. 106116.
a
Includes the Maquiladora sector.
878 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
reveals that during the 1990s, in anticipation of the passage of NAFTA, there was a surge of FDI
ows into industrial sectors producing small automobiles (e.g., Ford Escorts) and auto parts
(engines), industrial machinery and computers, electronic equipment, transportation equipment,
food precessing, and basic petrochemicals. This evolution in FDI ows is consistent with
Dunnings (1988) locational advantage hypothesis, particularly now that NAFTA has locked
in many of the neoliberal reforms initiated by both the De la Madrid (19821988) and Salinas
(19881994) administrations.
Nowhere is this better illustrated than in the impressive growth and transformation of the
Mexican auto industrya sector that has been one of the major recipients of net FDI ows
between 1994 and 1999 (10% of the total). Major U.S. auto companies (Ford, General Motors,
and Daimler-Chrysler) and the German auto company, Volkswagen, were able to transform an
inward-oriented and inefcient industry into an impressive and sophisticated export base from
which to take advantage of Mexicos strategic location and low unit labor costs (see Table 5) to
compete more effectively in the U.S. market with Japanese and Korean auto rms. In a study of
the industry, Calderon, Mortimore, and Peres (1995) report that the average annual production
of passenger automobiles in Mexico rose from 250,000 units during 19831987 to 860,000
units during 19921994, more than half of which were exported to the U.S. market (p. 30).
The export orientation of these rms is further corroborated in a recently published study by
ECLAC (2000) which shows that between 1990 and 1998 automobile production rose from
821,000 to 1,475,000 vehicles. During the same period, the share of exports in total production
rose from 33.7% to 68.5%, with exports to Canada and the U.S. constituting over 90% of total
exports (Table II.5, p. 113).
The export orientation of the automobile industry is not just conned to American producers
as attested by Volkswagens decision in 1995 to invest over US$ 1 billion and create close to
2000 jobs to expand its long-standing facilities in Puebla to produce exclusively its new Beetle
Table 5
Export propensity of the top 100 companies in Latin America, by sector, activity and company status, 1994 and
1997
a
Region/country 1994 1997
Domestic rms Foreign afliates Domestic rms Foreign afliates
Latin America
All sectors 15.9 15.1 31.0 26.2
Manufacturing 9.5 17.7 21.5 33.7
Brazil
All sectors 4.7 5.2 6.1 4.3
Manufacturing 8.8 5.9 22.4 5.3
Mexico
All sectors 17.2 48.6 29.3 71.4
Manufacturing 10.3 48.6 20.6 71.4
Source: United Nations, World Investment Report, 1998. New York and Geneva: United Nations (1998), Ta-
ble VIII.5, p. 257.
a
Export propensity is dened as the ratio of exports to sales multiplied by 100.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 879
for worldwide distribution. In fact, between 1990 and 1998 the proportion of the German
companys total passenger vehicles destined for the export market rose from 20% to 82.9%,
and according to ECLAC (2000), in 1998, the United States was the nal destination for 73%
of its output (p. 114).
The impressive growth in auto production and the improvement in quality can be attributed
to major investments by the big three in new plant, machinery and equipment, as well
as the reorganization of production along the lines of just-in-time inventory controls and
computer-aided manufacturing techniques, particularly in Fords state-of-the-art auto plants
in the northern states of Sonora and Chihuahua. Moreover, the big threes transformation
of the Mexican auto industry was motivated by the Japanese challenge in the U.S. market,
and it was made possible by the access to the Mexican market secured by the liberalization
process that culminated in the passage of NAFTA in November 1993. The unhindered access
to the low cost Mexican input market enabled U.S. auto rms to import the complementary
capital inputs and technology with little government interference, as well as establish numerous
links with local suppliers in the Maquiladora industry for auto repair parts and components (see
Moctezuma & Mugaray, 1997).
The successful establishment of the export platform was further secured by the Mexican
governments provision of adequate infrastructure and the NAFTA-created barrier to non-
members whichdemands that theyuse at least 62.5%of locallyproducedinputs inthe production
of passenger automobiles destined for the North American market. Somewhat unexpectedly,
however, instead of acting as a barrier to non-members, the NAFTA rules of origin played a
key role in adjusting and consolidating the operations of non-North American companies such
as Volkswagen. Undeterred by the Mexican 1994 currency devaluation and the sharp economic
contraction of 1995, the German company made a strategic (long-term) decision to adjust its
operations to the new NAFTA-induced constraints, thereby expanding and consolidating its
production base in Puebla in order to permanently access the North American market.
Mexico has also attracted substantial inows of FDI into apparel, banking and nancial ser-
vices, electronics and computers, telecommunications and the tourism industry. Many of these
sectors have a substantial TNC presence and are characterized by considerable intra-industry
specialization and subcontracting of local parts and components, which is likely to further en-
hance FDIs contribution to the transfer of technology and managerial knowhow (see Buitelaar
& Urrutia, 1999; United Nations, 1998). For example, Agosin (1995) reports a survey study
by Mortimore and Huss (1991) which nds that . . . of 67 [Mexican] companies surveyed,
37 used local subcontracting [and that] the branches with 100% foreign capital tended to use
subcontracting much more intensely than did branches with mixed ownership (p. 29).
16
In
addition, most of the sectors in which TNC afliates operate, particularly manufacturing, have
developed a strong outward orientation in recent years.
For example, Table 5 shows that the export propensity of the largest 100 TNCmanufacturing
afliates operating in the Mexican market rose from48.6%in 1994 to 71.4%in 1997, compared
to 10.3% and 20.6% for Mexican domestic manufacturing rms. The table also shows that, in
general, the export orientation of Mexicos largest rms (both domestic and foreign) in all sec-
tors, and particularly in manufacturing, is signicantly higher than that of Brazils top rms. This
is partly explained by the proximity to the U.S. market, Mexicos relatively lowunit labor costs,
and the investment opportunities offered by NAFTA. Finally, the table reveals that for Latin
880 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
America as a whole the process of trade liberalization and market-oriented reforms has resulted
in a higher export propensity for both its largest domestic and foreign rms in recent years.
4. Economic welfare effects of NAFTA
Economic theory suggests that, ceteris paribus, the unrestricted movement of capital from
where it is relatively abundant (the U.S.) to where it is relatively scarce (Mexico) generates
a net increase in the combined output of the countries in question. As indicated in Section 1,
however, the process of adjustment is not a smooth or painless one for the countries and/or
regions involved.
Critics of the new FDI-led outward-oriented strategy exemplied by the Mexican auto
industry contend that the industry has yet to establish signicant forward and backward link-
ages with the domestic market, make signicant contributions to the transfer of technologi-
cal and managerial knowhow, and advance national or social objectives (see Cypher, 2001;
Peters, 2000; Hart-Lansberg, 2002; Buitelaar & Urrutia, 1999). In addition, they argue that the
market-based and outward-oriented model embodied by the NAFTA has yet to increase signif-
icantly employment levels, real average wages, and average productivity (output per worker)
in the economy. According to ofcially reported data provided by INEGI, total employment
in Mexico grew from 33.9 million in 1995 to 38.6 million jobs in 1999, resulting in an annual
growth rate of just 1.2%. However, a study by CONAPO estimates that total employment must
growby at least 2.5%per year in order to meet the annual demand for 1.21.5 million newjobs.
The study goes on to note that this target can only be met if real GDP grows at about 7% per
yeara rate that was attained only once (2000) in the past decade, before promptly plunging
0.9%in 2001 as a result of the U.S. recession (see Salas, 2002; Peters, 2000). To make matters
worse, Table 6 shows that employment in the manufacturing sector, where working conditions
are relatively better and wages are higher than in other sectors of the Mexican economy, fell by
close to 14% between 1990 and 1999.
Neoliberal economists, however, point to the dramatic fall in the open unemployment rate
after 1995 (see Table 1) as proof positive that NAFTA has had a benecial effect on Mexican
workers by creating employment opportunities. Critics on the left counter by criticizing the
governments estimates because they count someone as employed if that person reports working
at least 1 h during the previous week or if they tell interviewers that they are certain to start
working within the next four weeks (see Salas, 2002, pp. 1219; Ramirez, 1989). In addition,
they caution that the countrys lack of unemployment compensation and other forms of social
support means that those individuals who report being unemployed tend to come frombetter-off
families that can afford to support themin their job search. The very poor, to paraphrase Gunnar
Mrydal, cannot afford the luxury of searching for a job for very long, so they stop the process
and are thus technically no longer counted among the unemployed (see Salas, 2002, pp. 1219).
Many of these people enter Hernando De Sotos informal sector, where they nd low-paying and
low-productive jobs such as street vending, shining shoes, parking attendants, and housework.
17
Critics contend that a better measure of Mexicos woeful underutilization of labor resources is
given by the underemployment rate. Table 1 shows that, even as late as 1999, at least 20% of
Mexicos economically active population was still either unemployed or underemployed.
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 881
Table 6
Mexico: employment, wages, productivity, and unit labor costs in Mexico, 19901999
a
Year Employment in
manufacturing
Wages in
manufacturing
Minimum
wages
Labor
productivity
b
Unit labor
costs
c
1990 102.2 102.5 63.8 112.0 100.1
1991 100.6 109.3 61.0 118.2 99.2
1992 96.7 119.0 58.2 126.0 102.2
1993 89.8 127.6 57.3 134.1 100.6
1994 87.1 132.3 57.3 143.3 98.2
1995 79.3 114.4 50.2 148.1 83.2
1996 81.2 102.0 46.0 159.4 69.5
1997 85.0 101.0 45.6 166.5 65.5
1998 86.2 102.8 45.3 173.1 65.1
1999 88.0 99.0 44.0 171.7 64.3
Change (%),
19931999
2.0 22.4 23.2 28.0 36.1
Source: Computed from Banco de Mexico (1999), Tables 20 and 21, pp. 227228; and Banco de Mexico (1997),
Table 20.
a
Manufacturing and minimum wages in 1985 = 100; employment, productivity, and unit labor costs in 1987 =
100.
b
Output per worker.
c
Wages per hour divided by output per man-hour.
In like manner, the performance of real wages under NAFTA has been lackluster at best, and
disastrous at worst. There has been a steady erosion in the purchasing power of both minimum
and average wages in the 1990s. Table 6 shows that the real minimum wage, which is used as
a reference point for wage bargaining each year, lost over 23% of its value between 1993 and
1999, while the average real wage in non-Maquiladora manufacturing lost 22%.
18
The dramatic
fall in real wages explains why labor income as a percentage of GDP fell from levels over 40%
in the early 1980s to 30.9% in 1994, and a mere 18.7% in 2000. Capitalists, on the other hand,
saw their prots as a share of GDP jump from 48% in 1982, to 57.1% in 1994, and 68.1% in
2000 (see OECD, 1995, pp. 3435; Peters, 2000, pp. 16061; Cypher, 2001, p. 21).
Obviously, the steep drop in labors share of national incomethe main source of income
for the majority of the populationdoes not bode well for the future of the Mexican economy
because it robs the country of requisite effective demand to sustain adequate levels of employ-
ment and income growth.
19
In addition, it has contributed to aggravating the countrys already
skewed distribution of income in recent years. For example, the income share of the top quintile
rose from 49.5% in 1984 to 54.2% in 1992, and remained essentially unchanged at 54.1% in
1998, while the cumulative share of the bottom 80% of the Mexican population fell from
50.5% in 1984 to 45.9% in 1998 (see INEGI, 1992, Table 27, p. 110; OECD, 1995, pp. 3435;
Cypher, 2001, Table 3, p. 30).
What about average labor productivity? Did it rise signicantly during the 1990s? After
all, NAFTA enthusiasts dubbed the 1990s the decade of hope as they envisioned the invis-
ible hand working its efciency magic via the liberalization of trade, deregulation of labor
and nancial markets, and privatization of state-owned enterprises. Answering this question
882 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
is difcult because of data shortcomings and conicting results cited in a number of studies
due to differences in methodology and estimation procedures (see Looney, 1985; Lustig, 2001;
Kim, 2001). For example, ofcial Mexican data reported in Table 6 shows that labor produc-
tivity in the manufacturing sector averaged a respectable 4.5% over the 19931999 perioda
rate that compares favorably with those recorded in this sector during the heyday of state-led
industrialization in the 1960s and early 1970s (between 3% and 5%).
20
Cypher (2001), on the other hand, cites data by Banamex (2000) which shows that non-
Maquiladora manufacturing average labor productivity rose by a mere 1.8%over the 19942000
period, and surprisingly, that Maquiladora [labor] productivity was just 0.9% over the same
period.
21
In this connection, Lustig (2001), a strong supporter of the NAFTA, claims that
since NAFTA went into effect in 1994, labor productivity has grown fast in the tradeable
sector [at an average of 2.3 per year between 1988 and 1994] but has been lagging in the
non-tradeable sectors (p. 99). She reports that the growth in average labor productivity in
the non-tradeable sector was a dismal 0.45% for the 19881994 period, similar to the rate
recorded in the 1980slost decade of development. She attributes the disparity in estimates
to the fact that rms operating in the tradeable sector, primarily in the border states, are larger
and more integrated with the U.S. market, have better access to credit, and are modernizing
more quickly relative to small and medium-sized rms producing for the internal market.
22
She opines that unless the Mexican state supports the lagging sectors with adequate economic
and social infrastructure, Mexicos already strong [sectorial and] regional inequalities will not
only remain but become exacerbated (p. 99).
23
The most dynamic tradeable sector, spurred on by a surge in FDI inows, has been without
question the Maquiladora sector.
24
Employment has increased in the booming Maquiladora
sector from 540,927 in 1993 to 1.3 million in 2000; in relative terms, Maquiladora employment
as a proportion of total employment in manufacturing has risen from 18.9% in 1993 to an
estimated 36% in 2000 (see Cypher, 2001, Table 1, p. 21). However, the shift away from the
traditional manufacturing sector to the Maquiladora sector has entailed high turnover rates,
lower wages, and no union representation for hundreds of thousands of Mexican workers.
For example, in the mid-1990s average Maquiladora wages were only 47% of the average
wage in the non-Maquiladora manufacturing sector, and although the wage gap narrowed to
approximately 80% by 2000, it was not the result of rapidly growing real wages for Maquila
workers; rather, it was the result of non-Maquiladora manufacturing wages falling at an even
faster rate than Maquiladora wages.
From the standpoint of labor standards, a troubling aspect of the Maquiladora industry is
that workers have little, if any, effective union representation and, in some sectors such as
textiles and apparel, toys, and electronic goods, employ a high proportion of young females
from rural areas (in some sectors the percentage of women is as high as 75%). These workers
are not provided with adequate working conditions, transportation, healthcare, and housing.
Turnover rates, therefore, tend to be high (e.g., in several Maquilas at least 50% of workers
report previous experience in 12 plants).
25
Even in state-of-the-art auto Maquilas in Nogales,
Mexico, Kopinak (1996), in a timely and well-researched study of 10 Maquiladoras, nds
that there is little, if any, effective union representation of workers economic interests and
constitutional rights. She cites a particularly revealing, and representative, interview with a
manager fromPlant Dwho volunteered the following opinion: The unique thing about Nogales
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 883
in comparison to Tijuana or Juarez is that it has no [independent] unions. When businesses come
here from somewhere else, they think that they are in heaven. The only unions are ones which
the company pays dues for, and workers dont even know that they belong (p. 169). It thus
remains an open question whether the institutionalization of NAFTA will lead to a model
of relatively weak union representation such as that found in Nogales, or whether Maquilas
will move toward a model of mutual accommodation and compromise among independent
unions, Maquila managers, and the Mexican government. So far, the Mexican government has
been reluctant to use its tremendous political leverage to support independent border unions
resist cuts in real wages and enforce labor contracts that incorporate basic protections such
as well-dened job descriptions, shop-oor representation, and seniority-based promotion and
job-security systems.
Another important criticism levied against the NAFTA is that its passage has further solidi-
ed the countrys structural dependence on the U.S. Critics contend that the inherent dynamism
of the Mexican manufacturing sector is generated primarily by the U.S export market and the
nancing provided by U.S.-based FDI ows, thereby rendering the Mexican economy struc-
turally dependent and vulnerable to the vicissitudes of the U.S. business cycle. In an ironic twist,
although dependencia theory has been all but abandoned in academic circles, including by most
leading Mexican economists, the countrys dependence on external factors (and the U.S.) has, if
anything, increased further since the passage of NAFTA. The U.S. market is nowthe destination
of almost 90% of the countrys exports (up from 70% in 1990), 85% of its imports (compared
to 65% in the early 1990s), and the source of three-quarters of all its foreign investment.
26
Critics on the left emphasize that, as a result of this locked-in structural dependence, the
relatively mild recession in the U.S. has generated a very sizable downturn in industrial produc-
tion and employment in 20012002, including the much heralded auto industry. Table 1 shows
that the Mexican economy is estimated to have contracted by 1% in 2001 with Maquiladora
sector production and employment falling, respectively, by 9.2% and approximately 20% (see
Hart-Lansberg, 2002; Quintin, 2002). They also argue that the long-term employment creation
of the industry is limited and unpredictable given that the technology transferred fromthe parent
companies is in the form of capital-intensive, computer-aided manufacturing techniques that
require a network of suppliers which must be globally integrated and highly responsive to the
changing cost and quality concerns of the TNCs.
In their view, the precarious nature of this industry has been fully exposed over the past two
years. Faced with rising unit labor costs that can be traced, in part, to the real appreciation of
the peso (see Table 1), a modest rise in Maquila wages, and sub-par labor productivity, the
Maquiladora sector has witnessed a growing exodus of TNCs that have decided to shift their
operations from Mexico to other low-wage countries, particularly China. According to The
Economist (2002), While the average labor cost for assembly plants in Mexico is now around
US$ 2 an hour, Chinas gure is 22 cents. Although plants in Mexico are more sophisticated, the
country has failed to develop a network of suppliers that would make it hard for manufacturers
to leave as the Chinese catch up (p. 36). Radical economist Hart-Lansberg (2002) observes
that this is a no-win situation for workers in Mexico as well as Asia. In no uncertain terms,
he concludes that it makes it crystal clear that neoliberalism is more an ideological cover for a
competitive race to the bottom than it is an economic approach capable of advancing a process
of human development (p. 25).
884 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
Cypher and Dietz (1997), Cypher (2001), and Hart-Lansberg (2002) also contend that the
direct subsidies provided by the Mexican government to the export-oriented rms, as well as
the large tax concessions and unlimited prot remittances they are granted, represent a major
diversion of scarce resources away from more socially desirable projects designed to meet
the urgent economic and social demands of the relatively larger non-tradable sector.
27
Cypher
(2001), for example, argues that Mexicos ability to compete and become an efcient producer
of high-value added products is hampered by the fact that, on average, it spends relatively
small amounts on education and research and development. For example, Mexicos outlays
for research and development (R&D) equaled 0.3%of GDP in 19962000. Advanced industrial
nations regularly devote 2% of GDP to R&D, and for Japan and Germany the gure is 3%
(p. 19). In terms of human capital, even pro-market analysts such as Gruben (2000, pp. 17) nd
that Mexicos educational attainment (as measured by average years of education) and health
indicators (measured by infant mortality) are abysmal when compared to developed countries
and weak relative to other Latin American nations. For example, at 11 years, Mexicos average
level of education places it markedly below developed countries such as Korea (14.6), the U.S.
(15.9) and France (15.5), far below Chile (12.6), and even Brazil (11.1).
28
Quintin (2002),
a fellow economist at the Dallas Fed, reports that a third of the workforce has not completed
primaryschool, andthe countrytodaystands roughlywhere S. Korea did40years ago (p. 3, see
Chart 3). In terms of infant mortality (deaths per thousand), Gruben notes that Mexico mortality
rate (at about 32 deaths per thousand) places it slightly below Brazil at 35, but markedly above
Argentina (22) and Chile (12), not to mention Korea, the U.S., and France (all in single digits).
The low and unequal levels of human capital accumulation in Mexico and the rest of Latin
America are particularly worrisome in light of new empirical evidence provided by the pio-
neering work of Birdsall, Londono, and OConnell (1998), and more recently, Baer, Campino,
and Cavalcanti (2001), and Ramirez and Nazmi (2003). For example, Birdsall nds that, via
both demand and supply channels, the regions low and unequal accumulation of human cap-
ital not only helps explains Latin Americas skewed distribution of income and poverty,
29
but
also contributes to explaining the regions low rates of investment and economic growth. Her
estimates suggest that both education accumulation along with capital accumulation have a
positive and statistically signicant effect on economic growth. Ramirez and Nazmi also report
estimates from a panel regression of nine major Latin American nations over the 19831993
period which suggests that public expenditures on education and healthcare have a positive and
statistically signicant effect on private capital formation and economic growth. Both sets of
results are consistent with the literature that argues that better-educated workers earn higher
incomes and, particularly in the case of women, are more effective in household production of
childrens good health and schooling (see Birdsall et al., 1998, p. 169).
More importantly are Birdsalls ndings, reported in Table 2, which show that, controlling
for the level of education, the degree of inequality in the distribution of education has a strong
and robust negative effect on growth (p. 169). That is, greater inequality in access to education,
independent of both the education level variable and the negative effect of the natural resource
variable, is associated with lower rates of economic growth in Latin America. Finally, the
elasticity of income growth of the poor with respect to initial inequalities in the distribution of
land and education have a clear negative effect on the income growth of the poor, by magnitudes
twice those of their effects on average income growth (p. 170). From a policy standpoint, she
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 885
concludes that if the great majority of the people of Latin America are to benet from more
growth and improved equity, then effective institutions must be created to ensure greater and
more equal access to education and healthcare so as to reverse the trickle-down approach so
prevalent in the region in recent years.
Finally, NAFTAcritics contend that the most important and politically sensitive impact of the
accord is in the area of subsistence agriculture because of its potential to increase both the supply
of unemployed Mexican farmers, rural violence, and migratory ows within Mexico and to the
U.S., over and above, presently high levels.
30
Small growers of corn, beans, barley, and wheat
in Mexico which number 8 million people or 22% of the economically active population do not
have the resources, access to credit, and technological knowhow to compete effectively against
relatively more efcient (and heavily-subsidized) agricultural producers in the U.S. and other
industrialized nations. For example, The Economist (2002) reports that in the U.S. subsidies
per farmer averaged US$ 20,000 in 2001, while in Mexico they were signicantly below US$
1000 (p. 31). Moreover, critics point out that the aforementioned levels of support to U.S.
farmers do not even include the amounts in the farm bill signed by the Bush administration
in 2001, which will provide U.S. farmers with an additional US$ 180 billion over the next 10
years! To be sure, the U.S. is by no means the only or worst offender because the governments of
Europe and Japan confer more generous levels of support to their farmers (see The Economist,
2002, p. 31).
In order to protect subsistence farmers in Mexico, tariff reductions under the NAFTA were
scheduled to be phased in over a 15-year period, with the removal of the last tariffs in 2008.
In practice, the removal of government subsidies, price supports, and the elimination of insti-
tutional support to this sector following the reform of Article 27 of the Constitution in 1992,
which essentially privatized the ownership of ejido (communal Indian) land, led to a pronounced
decline in agricultural prices and output. For example, ofcial Mexican data reveals that be-
tween 1996 and 1999, corn and wheat production fell, respectively, 17.8% and 12.2%, while
bean production rose by a mere 1.4%.
31
The dismal performance of this sector has generated
a ballooning agricultural trade decit with the U.S. that, according to The Economist (2002),
reached more than US$ 2 billion in 2001.
32
To compound matters, the 19941995 peso crisis, with its adverse output and price effects,
further devastated this sector and forced the Mexican government to, de facto, import much
more corn than that allowed by the tariff-rate quota (TRQ) regime in order to feed the countrys
growing poor who numbered 47 million in 2000, a 17.5% increase over 1996 (see Cypher,
2001). At the time that NAFTA was negotiated, Mexican corn producers (who number over 3
millionandhave, onaverage, ve dependents) were givenassurances, under Chapter VII, that the
government would support themduring the 15-year transition period with a variety of programs,
ranging from direct money outlays, credit, investments in infrastructure, and technical advise.
In reality, the 15-year transition was compressed into 30 months and, according to Raghavan
(2002), Between January 1994 and August 1996, domestic corn prices fell 48%, thereby
converging with the international market some 12 years ahead of the period set by NAFTA,
thus forcing Mexican corn producers into a rapid [and painful] adjustment (p. 5). He attributes
this to the Mexican government not implementing the TRQ as planned, but instead exempting
all corn imports [mostly from the U.S.] from tariff payments after 1994, on the grounds of a
need to lower prices and reduce inationary pressures (ibid.).
33
Even scholars such as Lustig
886 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
(2001) who are, in general, very supportive of market-based, outward-oriented reforms, and
NAFTA in particular, are led to conclude that,
Mexicos market oriented reforms . . . hurt performance in agriculture, where elimination
of state intervention left an institutional vacuum and many [subsistence] producers with
less access to credit and technical assistance. In developing country economies with market
failures in the traditional sectorsin credit and insurance markets, for examplepolicies to
enhance productivity cannot rely simply on withdrawing state intervention, but must rather
seek out an appropriate balance of state and market. (p. 90)
NAFTA critics such Cypher and Raghavan do not mince words. In their view, the decision to
liberalize the agricultural sector under NAFTA, particularly the corn sector, was based more on
neoliberal ideology than a careful analysis of how the accord would affect Mexican subsistence
agriculture.
5. Summary and conclusion
This paper has assessed the evolution and performance of several key economic and social
variables in Mexico following the passage of NAFTA. The evidence shows that under NAFTA
Mexican trade and foreign direct investment inows have risen at rapid rates, particularly in
the export-oriented Maquiladora (assembly-line) sector. However, the literature suggests that
it is hard to disentangle the effects of NAFTA from other non-NAFTA factors such as demand
in the U.S. in explaining rising trade ows between the U.S. and Mexico, particularly in the
booming Maquiladora sector.
More denite conclusions can be made with respect to FDI ows, where empirical evidence
supplied in this paper shows that institutional reforms under NAFTA have created a favorable
environment for foreign investors. The contribution of FDI ows to the nancing of capital
formation is not an unmitigated blessing, however. The paper shows that, once the rising re-
mittances of prots and dividends are deducted from gross FDI ows, the contribution FDI to
capital formation is far less than that advertised by neoliberal enthusiasts. Mexico has also done
an effective job of channeling these ows to the auto and engine assembly sector. There is also
some anecdotal evidencedisputed by critics on the leftwhich suggests that some auto plants
are engaged in substantial subcontracting for parts and repairs from domestic suppliers. Thus,
there is the potential for learning from doing as local suppliers gain experience in meeting
the design and quality standards of TNCs.
Turning to the performance of employment growth and real wages in the manufacturing
sector, the record has been lackluster at best and disastrous at worst. Employment in the manu-
facturing sector fell dramatically after the peso crisis, and remains stagnant as we enter the 21st
century. Real wages in manufacturing, not to mention real minimumwages, have plunged since
the peso crisis and have yet to recover levels attained in the mid-1980s. In terms of productivity
performance in this sector, no strong conclusions are possible given the poor quality and paucity
of the data and the different methodologies used by investigators, which, in part, explains the
conicting estimates. At best, the data show that average labor productivity has risen at healthy
rates in the export-oriented manufacturing sector, and stagnated in the non-tradeable sector
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 887
where most of the countrys small and medium-sized rms reside. This does not bode well for
the country because a dynamic sector catering to the domestic market is needed to absorb the
estimated 1.21.5 million new entrants into the labor force each year.
Mexican distributional indicators have also performed poorly during the 1990s. Both the
functional and size distribution of income (not to mention wealth) have become more skewed
during the period of trade and investment liberalization. Critics of the accord have furnished
compelling evidence which shows that the opening of Mexican goods and asset markets has
conferred disproportionate benets to those regions, sectors, and socioeconomic groups that
have the requisite infrastructure, nancial resources, and educational background to take ad-
vantage of market-based opportunities. In this respect, Mexico, like the rest of Latin America,
is characterized by low and unequal levels of human capital accumulation. Not surprisingly,
relatively few and large rms operating in sectors that are well-integrated with the U.S., pri-
marily in the northern states, have beneted fromthe liberalization process, while the small and
relatively numerous labor-intensive rms, often with no access to credit (and residing in the
countrys poor middle and southeastern states), have been left to languish. In this connection,
subsistence farmers producing staples such as corn and beans have been particularly hard hit
by the withdrawal of state and institutional support. Despite strong assurances from NAFTA
negotiators, Mexican corn producers have been harmed by falling prices and output generated
by a ood of imports from heavily-subsidized corn producers in the U.S and elsewhere.
As indicated in the introduction, this paper provides only a partial and modest contribution
to our understanding of the complex economic effects and broad-ranging issues that NAFTA
has generated for Mexico. The paper also makes evident that the NAFTA accord represents the
latest (and most dramatic) installment of a process of globalization that began in earnest with the
demise of state-led ISI following the onset and aftermath of the debt crisis. Many of the favorable
as well as disturbing trends examined above have been in place for sometime now. NAFTA has
only institutionalized, accelerated, and locked-in this market-based process of integration.
Still, as the economist and social critic Polanyi (1944) reminds us, this market-determined path
is by no means irreversible, particularly if the distributional and regional costs generated by
freer trade are not addressed by assertive public policy that complements markets with adequate
economic and social infrastructure and creates an effective legalinstitutional framework that
promotes competition and equality of opportunity.
Not surprisingly, the debate surrounding NAFTAs passage, followed by its phased imple-
mentation, has led to the establishment of transnational citizen networks such as the coalition for
justice in the Maquiladoras, the fair trade campaign, union groups such as the United Electrical
Workers and the Frente Autentico del Trabajo, the Mexican Action Network on Free trade,
Mujer-a-Mujer, Southerners for Economic Justice, etc. All of these community action groups
and organizations have raised the general publics awareness of the importance of protecting
labor rights, wages, working conditions, and the environment in Mexico and elsewhere.
In the nal analysis, it is up to these activist groups and non-governmental organizations,
and the public at large, to ensure that NAFTA becomes a vehicle for pressing their respective
governments to both enforce existing labor laws and environmental regulations in the NAFTA
document anddevice future trade andinvestment policies that are transparent, increase corporate
accountability, and are armed with appropriate sanctions to ensure equitable and sustainable
development for the citizens and communities of the signatory countries.
888 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
Notes
1. In 1999, 409 million people lived in the three nations of North America, and their
combined gross domestic product (GDP) was almost US$ 10 trillion. In terms of territory,
population, and GDP, NAFTA is larger than the 15-nation European Union (see Pastor,
2001, Table 1.1, p. 7).
2. With the enactment of NAFTA, average U.S. tariffs on Mexican products fell immedi-
ately from 3.3% to 1.1%, while Canadian tariffs dropped from 2.4% to 0.9%. Mexican
average tariff levels fell from 11% to 5% (see 2000, pp. 56).
3. Estimates obtained from Banco de Mexico, The Mexican Economy 1999.
4. Operating under the transitional adjustment assistance program (NAFTATAAP), the
U.S. Department of Labor certied that between 1994 and 1999 nearly 260,000 workers
were eligible for assistance because of jobs lost due to import competition from Mexico
and Canada or because of plant relocation to either country. In other words, the actual
amount of U.S. jobs displaced because of NAFTA is 86.7% of the numbers estimated by
the Hijinosa et al. model. For further details, see Haar and Garrastazu (2001), Table 2,
p. 5.
5. On this point Lustig (2001) observes that . . . it took Chile more than ten yearsand
a severe nancial crisis in 1982to reap the benets of market-oriented reforms and
macroeconomic discipline (p. 89).
6. For a cogent discussion of the impact of trade liberalization on private sector expecta-
tions, and therefore, the credibility of reforms, see Rodrik (1992, pp. 87105).
7. For further details on the devastating impact of the IMF-sponsored austerity program,
see Ramirez (1997, pp. 129156).
8. Of the many restrictive assumptions underlying the basic HOtrade model (e.g., identical
preferences and technology between trading nations), perhaps the most problematic one
is the assumption of full employment of economic resources. This is a totally unrealistic
assumption in LDCs such as Mexico where a signicant percentage of the labor force is
either unemployed, underemployed, or in the informal sector (see Table 1). Under these
conditions, it is possible to increase production (and employment) in both traded and
non-traded sectors without sacricing economic efciency (see Husted &Melvin, 2000).
9. See Irwin (2002) for a sensible treatment of the relative costs and benets associated
with freer trade.
10. Calculated from Banco de Mexico (1999), Appendices A and B, pp. 208230.
11. In fact, the Hausmann test shows that the instrumental variables model is not statistically
different from the OLS model, thereby obviating the need for an instrumental variables
approach. Nevertheless, Gruben proceeds to construct an instrumental variable equation
. . . because of theoretical reasons to suspect simultaneity bias (p. 19).
12. It goes without saying that the US$ 51 billion rescue package put together by the Clinton
administration played a key role in preventing a nancial and economic meltdown in
Mexico (such as the one now taking place in Argentina) with far-reaching repercussions
in terms of political turmoil in Mexico, large-scale illegal immigration, and the likely
loss of jobs in export-oriented industries in the U.S. For further details see Whitt (1996).
13. For further details see Ramirez (2002, pp. 416421).
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 889
14. Critics such as Cypher and Dietz (1997) also emphasize that substantial ows of capital
leave LDCs such as Mexico via the subsidiaries widespread practice of intra-transfer
pricing, viz., their over-invoicing of imports from, and under-invoicing exports to, the
parent company.
15. FDI stock data obtained from United Nations, World Investment Report, 1998. New
York and Geneva: United Nations (1998), Table B.3, pp. 374375; and ECLAC, Foreign
Investment in Latin America and the Caribbean1999 Report. Santiago, Chile: United
Nations (2000, p. 9), and ECLAC (2002, Table 12, p. 760).
16. The ndings reported by Agosin (1995) on the subcontracting practices of TNCS in
Mexico are corroborated by two recent studies by Moctezuma and Mugaray (1997,
pp. 95103) and Buitelaar and Urrutia (1999, pp. 151).
17. Estimates of the size of the informal sector range between 50% and 60% of the econom-
ically active population (see Quintin, 2002). Mexican economist Peters (2000) reports
that Between 1988 and 1996, 6.5 million persons did not nd a formal jobi.e., only
39.3% of the growing EAP found a formal job, the rest of employment generation was
created in the informal sector and/or migration to the U.S. (p. 163).
18. Mexicaneconomist Peters (2000) contends that real minimumwages are a veryimportant
source of income for poor households in Mexico. His estimates for 1996 show that the
current monetary income of 51.2% of Mexican households is between 0 and 3 times the
minimum wage (p. 161).
19. Keynes (1936), for example, argued that Measures for the redistribution of incomes in
a way likely to raise the propensity to consume may prove positively favorable to the
growth of capital (p. 373).
20. For data on Mexican labor [and total factor] productivity during the 1960s, 1970s,
and early 1980s, see Looney (1985, Table 1.2, pp. 67). See also, Ramirez (1989,
pp. 4554).
21. Grupo Financiero Bancomer economists Sanchez and Karp (1999), both strong sup-
porters of the NAFTA, also note that Surprisingly, since NAFTA took effect, no clear
increase in average productivity or in real wages has occurred [in the manufacturing sec-
tor] . . . After the 1995 crisis, NAFTA seems to have involved a signicant absorption of
cheap labor, thereby reducing productivity in this sector (p. 17). Insofar as real wages
are concerned, their gure (Chart 5) clearly shows that since 1996 real wages have been
stagnant in the manufacturing sector and well below their levels in 1994.
22. Senior Dallas Fed economist Quintin (2002) cites evidence which indicates that over
half of Mexican rms [mostly small and medium-sized ones] described their access to
nancing as severely limited, compared with 15%in the U.S. In Singapore . . . only 10%
of rms reported that they faced the same situation (pp. 34, see also Chart 7). In this
connection, Cypher (2001) reports evidence that as a result of the privatization and near
collapse of the Mexican banking system bank loans to the private sector fell from 45%
of GDP in 1994 to a mere 11.6% [in 2000] (p. 13). For further details, see Dallas Fed
Vice President, William Gruben (2000, pp. 17).
23. The divergent trend between productivity and real wages, in and of itself, should give
pause to neoliberal economists. After all, economic theory tells us that, in competitive
labor markets, average real wages reect average productivity. In other words, unit labor
890 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
costs should remain roughly the same over time. As clearly shown by Table 6, this has
not been the case in recent years for the Mexican manufacturing sector.
24. Quintin (2002), a senior economist at the Dallas Fed, observes that rms that re-
ceive foreign direct investment account for over 20% of all employment in Mexico
. . . Within Manufacturing, the Maquiladora sector accounts for a third of foreign [di-
rect] investment (p. 2).
25. The high turnover rates that Kopinak (1996) nds in the 10 Nogales Maquilas she studied
is consistent withthe viewthat workers whoare dissatisedwiththeir workingconditions
have few alternatives except to quit their jobs and nd work at other Maquilas with
better working conditions (p. 177).
26. For further details see Quintin (2002), Figs. 1 and 2, p. 2. For earlier estimates on
Mexicos dependence on the U.S. market, see Ramirez (1993, pp. 182187).
27. Rodrik (1999), another important critic of the neoliberal model, makes the important
point that the export-at-all costs strategy implemented by Mexico will not not yield
much unless policymakers . . . focus on the fundamentals of economic growth
investment, macroeconomic stability, human resources, and good governanceand not
let international economic integration dominate their thinking on development (p. 13).
His research leads him to conclude that, in the absence of necessary complements,
a strategy of external liberalization will cause instability, widening inequalities, and
social conict (p. 137).
28. Quintin (2002) also comes to a similar conclusion. He notes that as recently as 10
years ago [1990], only a third of Mexicos education budget was allocated to primary
education [compared to Koreas two-thirds back in 1970] (p. 4). This share rose to one
half in 1995 but, according to Quintin, it will take a generation for these efforts to begin
paying off (p. 4).
29. For example, Birdsalls estimates suggest that if the economies of Latin America had
maintained the same income distribution throughout the 1980s as in 1970, the increase
in poverty over the 19831995 would have been smaller by one half (Fig. 6) (p. 170).
30. Dallas Fed Economist Pia M. Orrenius (2001) reports that border patrol apprehensions
have jumped from about 900,000 in 1993 to 1.5 million in 1999 (see Fig. 2, p. 3).
She further notes that the undocumented immigrant population from Mexico was es-
timated at 3.1 million in 1997 (about 60% of the total undocumented population of the
U.S.) . . . and that the net inowof illegal immigrants fromMexico, excluding short-term
cyclical migrants, averaged about 202,000 immigrants per year between 1987 and 1996
(p. 2).
31. Obtained from Banco de Mexico (1999), The Mexican Economy, Table 12, p. 219.
32. Wiggins, Preibisch, and Proctor (1999) in a careful three-year (19961998) study of
the impact of policy liberalization on four rural communities in Mexico, nds that,
contrary to neoliberal claims, the hope that private companies would provide services
to farmers once supplied by the state has been rebuffed. Farmers face technical and
ecological difculties with their crops, but neither state nor private actors are able or
willing to offer any help. Technical assistance and credit are notable by their absence:
the private sector seems uninterested in the small farmers of the four villages studied
(p. 1042).
M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892 891
33. According to Raghavan (2002), during the 15-year transition period, the tariff free
quota, initially set at 2.5 million tons a year, was to be expanded at a constant rate of
3% per annum, while the applicable ad valorem tariff for imports exceeding the quotas
would be reduced from 206% in 1994 to 0% by 2008 (p. 4).
References
Agosin, M. R. (Ed.). (1995). Foreign direct investment in Latin America. Washington, DC: Inter-American
Development Bank.
Baer, W., Campino, A., &Cavalcanti, T. (2001). Health in the development process: The case of Brazil. The Quarterly
Review of Economics and Finance, 41, 405425.
Banamex. (2000). Review of Economic Situation in Mexico, April, pp. 123127.
Banco de Mexico. (1997). The Mexican Economy, Mexico City.
Banco de Mexico. (1999). The Mexican Economy, Mexico City.
Birdsall, N., Londono, J. L., & OConnell, L. (1998). Education ill Latin America: Demand and distribution are
factors that matter. Cepal Review, 66(December), 3952.
Buitelaar, R. M., & Urrutia, R. P. R. (1999). The in-bond assembly industry and technical change. Cepal Review,
67(April), 137156.
Bursher, M. E., Robinson, S., & Thierfelder, K. (2001). The impact of NAFTA on the United States. Journal of
Economic Perspectives, 15(Winter), 125144.
Calderon, A., Mortimore, M., & Peres, W. (1995). Mexicos incorporation into the new industrial order: Foreign
investment as a source of international competitiveness. Desarrollo Productivo, 21, 141.
Cornelius, W. (1986). The political economy of Mexico under de la Madrid: The crisis deepens, 19851986. San
Diego, CA: Center for U.S.-Mexican Studies, UCSD.
Cypher, J. M. (2001). Developing disarticulation within the Mexican economy. Latin American Perspectives,
28(May), 1137.
Cypher, J. M., & Dietz, J. L. (1997). The process of economic development. New York: Routledge.
Cross Border Business Associates. (1999). U.S.Mexico trade and Maquiladora industry overview. San Diego, CA:
Cross Border Business Associates.
Dornbusch, R., & Werner, A. (1994). Mexico: Stabilization, reform and no growth. Brookings Papers on Economic
Activity, 1, 253289.
Dunning, J.H. (1988). Explaining International Production. London: Harper Collins.
ECLAC. (1998). La Inversion Extranjera en Amrica Latina j EL Caribe Santiago, Chile: naciones unidas, 1998.
ECLAC. (2000). Foreign investment in Latin America and the Caribbean, 1999 Report. Santiago, Chile: United
Nations.
ECLAC. (2002). Economic survey of Latin America and the Caribbean, 20012002. Santiago, Chile: United Nations.
Gould, D. M. (1998). Has NAFTA changed North American trade? Economic Review, Dallas Fed, First Quarter,
1222.
Gruben, W. C. (2000). The Mexican economy since the Tequila crisis. A presentation to the board of directors of
the Federal Reserve Bank of Dallas, November, 17.
Gruben, W. C. (2001). Was NAFTA behind Mexicos high Maquiladora growth? Economic and Financial Review,
Dallas Fed, Third Quarter, 1121.
Haar, J., & Garrastazu, A. (2001). Free trade and worker displacement: The Trade Adjustment Assistance Act and
the case of NAFTA. The NorthSouth Agenda, Paper 43 (February), 128.
Hart-Lansberg, M. (2002). Challenging Neoliberal myths: Acritical look at the Mexican experience. Monthly Review,
54(December), 1427.
Husted, S., & Melvin, M. (2000). International economics (5th ed.). New York: Addison-Wesley.
INEGI (Instituto Nacional de Estadistica Goegraa e Informatica). (1992). Income and expenditure survey of
households. Mexico City: INEGI.
Irwin, D. A. (2002). Free trade under re. Princeton, NJ: Princeton University Press.
892 M.D. Ramirez / The Quarterly Review of Economics and Finance 43 (2003) 863892
Keynes, J. M. (1964) (orig. 1936). The general theory of employment, interest, and money. New York: Harcourt
Brace, & Company.
Kim, W.-H. (2001). The effects of NAFTA on Mexicos economy and politics. Working Paper. Seoul: Korea Institute
for International Economic Policy.
Kopinak, K. (1996). Desert capitalism: Maquiladoras in North Americas western industrial corridor. Tucson, AZ:
The University of Arizona Press.
Krueger, A. (1999). Trade creation and trade diversion under NAFTA. Working Paper No. 7429, NBER. Cambridge,
MA: National Bureau of Economic Research.
Looney, R. F. (1985). Economic policymaking in Mexico. Durham, NC: Duke University Press.
Lustig, N. (2001). Life is not easy: Mexicos quest for stability and growth. Journal of Economic Perspectives,
15(Winter), 85106.
Lustig, N., Bosworth, B. P., & Lawrence, R. Z. (Eds.). (1992). North American free trade: Assessing the impact.
Washington, DC: Brookings Institution.
Moctezuma, A., & Mugaray, A. (1997). Subcontratacion Entre Maquiladoras y Pequenas Empresas en Mexico.
Comercio Exterior, 47(February), 95103.
Mortimore, M. & Huss T. (1991). Encuesta Industrial en Mexico: Comercio Exterior, 41 (7), 133.
OECD (Organization for Economic Cooperation and Development). (1995). OECD economic surveys: Mexico.
Paris: OECD.
Orrenius, P. M. (2001). Illegal immigration and enforcement along the U.S.Mexico border: An overview. Economic
and Financial Review, Dallas Fed, First Quarter, 111.
Orrenius, P. M., & Berman, A. L. (2002). Growth on the border or bordering on growth, southwest economy. Dallas
Fed, 3(May/June), 112.
Pastor, R. A. (2001). Toward a North American community. Washington, DC: Institute for International Economics.
Peters, E. D. (2000). Polarizing Mexico. Boulder: Lynne Rienner Publishers.
Plasschaert, S. (Ed.). (1994). Transnational corporations: Transfer pricing and taxation. London: Routledge.
Polanyi, K. (1944). The great transformation. Boston: Beacon Press.
Quintin, E. (2002). Is Mexico ready to roar? Southwest Economy, Dallas Fed, Issue 5 (September/October), 14.
Raghavan, C. (2002). Mexico: NAFTA corn liberalization fails farmers and the environment. Third World Network.
http://www.twnside.org.sg/title/mexico.htm
Ramirez, M. D. (1989). Mexicos economic crisis: Its origins and consequences. New York: Praeger Publishers.
Ramirez, M. D. (1997). The latest IMF-sponsored stabilization program: Does it represent a long-term solution for
Mexicos economy? Journal of Inter-American Studies and World Affairs, 38(Winter), 129156.
Ramirez, M. D. (2002). Foreign direct investment in Mexico during the 1990s: An empirical assessment. Eastern
Economic Journal, 28(Summer), 409423.
Ramirez, M. D., & Nazmi, N. (2003). Public investment and economic growth in Latin America: An empirical test.
Review of Development Economics, 7(February), 115126.
Rodrik, D. (1992). The Limits of trade policy reform in developing countries. Journal of Economic Perspectives,
6(Winter), 87105.
Rodrik, D. (1999). The new global economy and developing countries: Making openness work. Washington, DC:
Johns Hopkins University Press.
Salas, C. (2002). The impact of NAFTAon wages and incomes in Mexico. Brieng Paper. Washington, DC: Economic
Policy Institute.
Samuelson, P. (1948). International trade and the equalization of factor prices. Economic Journal, 58(June), 163184.
Sanchez, M., & Karp, N. (1999). NAFTAs economic effect on Mexico. Working Paper presented at the NBER 12th
Annual Inter-American Seminar on Economics (pp. 131), Buenos Aires, Argentina, December 24, 1999.
Scott, R. E. (1999). NAFTAs pain deepens: Job destruction accelerates in 1999 with losses in every state. Brieng
Paper. Washington, DC: Economic Policy Institute.
The Economist. (2002). Floundering in a tariff-free landscape (pp. 3132), November 30, 2002.
United Nations. (1998). World investment report 1998. New York: United Nations.
Whitt, Jr., J. A. (1996). The Mexican peso crisis. Economic Review, Atlanta Fed, January/February, 120.
Wiggins, S., Preibisch, K., &Proctor, S. (1999). The impact of agricultural policy liberalization on rural communities
in Mexico. Journal of International Development, 11, 10291042.
East Asian economic regionalism: progress
and challenges
Masahiro Kawai
1
Institute of Social Science, University of Tokyo, Tokyo, Japan
Received 10 January 2004; received in revised form 21 October 2004; accepted 19 January 2005
Abstract
This paper demonstrates that the East Asian economies have achieved strong economic inter-
dependence, particularly through external liberalization, domestic structural reforms and market-
driven integration with the global and regional economies. Expansion of foreign trade, direct
investment and nancial ows has created a naturally integrated economic zone in East Asia.
Reecting the rising economic interdependence and in response to the traumatic nancial crisis of
19971998, East Asia has embarked on various initiatives for economic regionalism. Such initiatives
include the formation of several bilateral FTAs, the beginning of negotiations for sub-regional FTAs,
the establishment of a regional surveillance mechanism, the introduction of a regional liquidity
support system (CMI) and Asian bond market development. These essentially entail the formal
institutionalization of de facto economic integration and interdependence in East Asia in a way that
complements global frameworks of the WTO and the IMF. The paper identies a number of
challenges facing the region, including the need to begin negotiations on a region-wide FTA and to
initiate exchange rate policy coordination.
# 2005 Elsevier Inc. All rights reserved.
Keywords: East Asia; Economic regionalism; Liberalization
Journal of Asian Economics 16 (2005) 2955
E-mail address: kawai@iss.u-tokyo.ac.jp.
1
The author is grateful to Michael Plummer, editor of this special issue, for advice on the paper and to Steven
Green for editorial assistance. He also acknowledges nancial support under Grant-in-Aid for Scientic Research
(B-16330058) provided by the Japan Society for the Promotion of Science.
1049-0078/$ see front matter # 2005 Elsevier Inc. All rights reserved.
doi:10.1016/j.asieco.2005.01.001
1. Introduction
Over the last two decades, the East Asian economies have substantially liberalized
foreign trade and direct investment (FDI) regimes within the frameworks of GATT/WTO
and APEC. The resulting expansion of trade and FDI has become the engine of economic
growth and development in East Asia. Since the early 1990s, emerging East Asia has also
liberalized its nancial systemand capital accounts. The consequent nancial openness has
contributed to rapid economic growth by attracting both long-term and short-term capital
and, together with trade and FDI openness, deepened market-driven economic
interdependence in East Asia. But it added nancial vulnerabilities, culminating in a
nancial crisis in 19971998.
Following the crisis, the East Asian economies have embarked on various initiatives for
economic regionalism in the areas of trade/investment and money/nance. The crisis
prompted the regions economies, which were increasingly interdependent, to realize the
importance of economic cooperation among themselves and to make efforts to
institutionalize such interdependence. For example, Japan and Singapore concluded an
economic partnership agreement (EPA), and many ofcial discussions and negotiations for
bilateral and sub-regional free trade agreements (FTAs)such as JapanKorea EPA,
ChinaASEAN FTA and JapanASEAN EPAare currently underway. In the area of
money and nance, the ASEAN + 3 memberscomprising ASEAN, China, Japan and
Koreabegan to undertake the Chiang Mai Initiative, economic surveillance and policy
dialogue, and the Asian bond market development initiative.
The organization of the paper is as follows. Section 2 discusses the logic of recent
economic regionalism in East Asia, emphasizing the importance of increasing economic
interdependence among the regional economies and the lack of regional institutions and
mechanisms that match such interdependence. It emphasizes the surprising extent to which
the regional economies are integrated through trade, FDI and nance and are
interdependent in macroeconomic cycles. Section 3 considers (past and present) economic
cooperation initiatives in East Asia, followed in Section 4 by a detailed analysis of the
issues and challenges for closer economic regionalismor greater institutionalization of
de facto regional economic integration in East Asiathat can potentially lead to the
creation of an East Asian Economic Community. Section 5 provides concluding remarks,
arguing that deeper economic integration in trade, investment and nance and further
institutionalization of such integration can mutually reinforce each other. Building trust
and developing political leadership are essential to transform the current drive for
economic regionalism into a much higher level of integration.
2. The logic of economic regionalism in East Asia
2.1. Deepening of economic interdependence
The most fundamental rationale behind the emergence of recent economic regionalism
is the deepening of regional economic interdependence in East Asia. Economic
regionalism, through various types of policy coordination, can resolve the collective
M. Kawai / Journal of Asian Economics 16 (2005) 2955 30
action problem by internalizing the externalities and spill-over effects that arise from
interdependence.
2.1.1. Trade integration
The East Asia region has long enjoyed market-driven integration through trade and FDI,
while embracing a multilateral liberalization framework under the GATT/WTO and, more
recently, open regionalism through Asia-Pacic Economic Cooperation (APEC). The
region has avoided discriminatory trade practices. FDI ows to the East Asian economies,
driven initially by Japanese multinational corporations after the Plaza Accord in the mid-
1980s, have generated intra-industry trade within the region and have contributed to deeper
economic integration. More recently, Asian NIEs and some middle-income ASEAN
countries have become active as investors, particularly in China, whose rise as a large
trading nation has also strengthened tradeparticularly intra-industry tradelinkages
among the East Asian economies, many of which are generated by multinationals.
The degree of regional economic integration through trade in East Asia has been rising
fast over the last 20 years. Table 1a summarizes changes in the share of intra-regional trade
for various groupings in the world over the period 19802003. The table demonstrates that
intra-regional trade as a share of East Asias total trade has risen from 35% in 1980 to 54%
in 2003 (including Japan) or from 22% to 44% over the same period (excluding Japan).
Now about 55% of East Asias trade is with itself. The recent share of intra-regional trade
within East Asia is still lower than that in the European Union-15 (64%), but exceeds that
of the North American Free Trade Area (46%) in 2003.
Table 1b summarizes changes in the intra-regional trade intensity indexes for the same
groupings over the same period.
1
The table demonstrates that within East Asia, whether
including Japan or not, the trade intensity index, at around 2.2, is higher than those for the
EU (1.7), though it is lower than that for NAFTA (2.5) in 2003. This observation conrms
that the degree of regional economic integration through trade in East Asia is quite high and
comparable to levels seen in NAFTA or the EU. It must be emphasized that intra-East Asia
trade has expanded rapidly but not at the expense of extra-regional trade. This suggests that
East Asia continues to maintain export competitiveness vis-a`-vis countries outside the
region.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 31
Table 1a
Intra-regional trade share
(a)
(in percentage)
Regions 1980 1985 1990 1995 2000 2001 2002 2003
East Asia-15, including Japan
(c)
34.7 40.2 45.6 55.5 54.0 55.4 57.3 54.0
Emerging East Asia-14
(c)
21.6 29.1 36.4 43.7 43.4 45.6 47.5 44.1
NIEs-4 7.7 10.7 14.3 18.1 16.4 17.5 17.1 16.1
ASEAN-10
(c)
18.0 20.3 18.9 24.1 25.7 24.1 24.4 24.0
NAFTA 33.8 38.7 37.9 43.2 48.7 49.0 48.3 46.0
European Union-15 52.4 52.5 58.6 56.8 62.2 62.1 62.4 64.4
1
The advantage of using trade intensity indexes over trade shares is that the former control for a regions
relative size in world trade and, hence, present a better measure of closeness of the economies within a region.
However, a small regional group tends to have a high trade intensity index.
2.1.2. FDI integration
The source country (area) breakdown of FDI inows into East Asia deserves
attention. Table 2 indicates that rms in the major industrialized countries are the ma
in investors in emerging East Asia. Indeed rms in the United States, Japan and the
European Union account for 16%, 12% and 11%, respectively, of emerging East
Asias cumulative FDI inows over the period 19902002. More specically, the
largest investors in the Asian NIEs, particularly in Singapore and Taiwan, come from the
United States. In contrast, Japan is the largest developed country investor in ASEAN
(excluding Singapore), particularly in Thailand and Indonesia. In the case of China,
however, Hong Kong is the largest investor and no major industrial country dominates in
terms of FDI. Notable is the rising importance of FDI by the Asian NIEs rms, which
account for 48% of total FDI inows to ASEANparticularly in Indonesia, Malaysia
and Vietnamand to China.
2
All in all, Japan, the United States and the European Union
are equally important foreign direct investors in East Asia, with Japan being the most
signicant in ASEAN.
3
The recent rise in Asian NIEs investment contributes to the integration of the East
Asian economies through FDI and FDI-driven trade. East Asia has seen the formation of an
FDI-trade nexusmutual reinforcement between FDI and trade. An underlying
determinant of the FDI-trade nexus is the establishment of regional production networks
and supply chains by multinational corporations. These networks have promoted intra-
regional division of labor in East Asia through fragmentation of the production process into
M. Kawai / Journal of Asian Economics 16 (2005) 2955 32
Table 1b
Intra-regional trade intensity index
(b)
Regions 1980 1985 1990 1995 2000 2001 2002 2003
East Asia-15, including Japan
(c)
2.5 2.4 2.5 2.3 2.2 2.5 2.5 2.2
Emerging East Asia-14
(c)
2.9 3.2 3.2 2.7 2.4 2.8 2.8 2.3
NIEs-4 2.0 2.1 2.1 2.0 1.7 2.1 2.1 2.0
ASEAN-10
(c)
4.8 5.7 4.4 3.7 4.1 4.1 4.2 4.1
NAFTA 2.1 2.0 2.1 2.4 2.2 2.3 2.4 2.5
European Union-15 1.4 1.5 1.5 1.6 1.7 1.7 1.7 1.7
Note: (a) The intra-regional trade share is dened as: X
ii
/{(X
i
+ X
i
)/2} where X
ii
represents exports of region i to
region i, X
i
represents total exports of region i to the world, and X
i
represents total exports of the world to region i.
(b) The trade intensity index is dened as: [X
ii
/{(X
i
+ X
i
)/2}]/[{(X
i
+ X
i
)/2}/X

] where X

represents total world

exports.
(c) East Asia-15 includes Emerging East Asia-14 and Japan. Emerging East Asia-14 includes the Asian NIEs
(Hong Kong, Korea, Singapore and Taiwan), nine ASEAN members (Brunei, Cambodia, Indonesia, Laos,
Malaysia, Myanmar, Philippines, Thailand and Vietnam) and China. ASEAN-10 includes Singapore.
(d) Computation is based on exporting countries export data, except for Taiwan where importers import data are
used when necessary.
Source: Computed from IMF, Direction of Trade Statistics.
2
The large volume of Hong Kongs FDI ows to China, however, may contain round tripping from China
which aim to take Chinas tax and other favorable advantages given to foreign direct investment.
3
If data for the 1980s are included, the importance of Japan as a major investor in ASEAN would become more
signicant.
M
.
K
a
w
a
i
/
J
o
u
r
n
a
l
o
f
A
s
i
a
n
E
c
o
n
o
m
i
c
s
1
6
(
2
0
0
5
)
2
9

5
5
3
3
Table 2
Emerging East Asias FDI Inows, 19902002 (million US dollars)
FDI inows from 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Total (1990
2002)
(a) Asian NIEs
United States 3,299 2,612 1,410 2,512 5,311 4,364 4,630 4,845 5,139 9,350 13,705 10,797 2,651 70,625 23.5
European Union 2,496 1,990 1,072 1,521 2,403 2,404 3,642 3,313 2,337 3,533 8,765 4,939 3,654 42,070 14.0
Japan 1,391 2,081 772 1,499 2,187 2,822 2,781 2,979 5,483 8,425 2,805 6,639 4,323 44,185 14.7
Asian NIEs 200 165 254 225 441 242 568 419 847 1,642 9,112 2,117 876 17,109 5.7
Total 7,693 7,338 3,812 6,192 10,735 10,541 13,174 13,177 25,897 42,312 92,656 46,605 19,798 299,930 100.0
(b) ASEAN-9
United States 359 758 1,633 1,923 865 1,494 1,782 2,187 3,546 1,872 2,349 422 614 19,805 16.3
European Union 2,061 1,784 1,440 1,999 1,069 2,389 4,052 3,548 2,853 959 1,156 1,644 1,889 26,843 22.0
Japan 494 777 2,375 1,505 1,889 1,638 1,653 3,006 2,066 2,852 745 807 1,481 21,288 17.5
Asian NIEs 2,183 2,629 1,804 2,334 3,709 2,956 3,681 3,352 2,033 677 1,467 807 1,442 29,074 23.9
Total 6,399 8,038 9,301 10,052 9,408 12,070 15,125 14,930 13,109 7,078 5,222 3,672 7,408 121,814 100.0
(c) China
United States 189 200 599 1,682 2,456 2,934 3,792 4,282 5,445 5,656 5,222 5,091 5,198 42,746 10.1
European Union 242 296 417 731 1,815 2,982 2,813 2,950 2,308 2,436 2,402 3,572 3,376 26,340 6.2
Japan 119 277 185 786 2,301 2,914 3,706 3,668 4,988 3,850 5,780 3,491 2,872 34,937 8.3
Asian NIEs 2,081 2,687 9,021 21,831 23,681 22,978 23,959 24,014 21,192 19,220 16,591 22,405 25,496 235,156 55.5
Total 3,487 4,366 11,156 27,515 33,787 35,849 40,180 44,237 43,751 38,753 40,715 46,878 52,743 423,417 100.0
Note: FDI recipient data (compiled by IITI) are proportionally adjusted so that they are made consistent with BOP gures. Asian NIEs include Singapore and ASEAN-9
excludes Singapore.
Source: Institute for International Trade and Investment; UNCTAD, World Investment Report 2004.
different sub-processes located in different countries based on comparative advantage
relative factor proportions and technological capabilities. This strategy has stimulated
vertical intra-industry trade in parts, components, semi-nished and nished products.
4
Its
important implication is that large inows of FDI to emerging East Asia have stimulated
the regions engagement with trade, in a way that reects the individual economies stages
of industrial development. More recently China has also begun to participate in such
activities in an explosive way.
2.1.3. Financial and macroeconomic interdependence
Market-driven nancial integration has also been underway as a result of the increased
deregulation of the nancial system, opening of nancial services to foreign institutions,
and liberalization of the capital account in the East Asian economies. Commercial banks
have extended cross-border loans to banks and corporations throughout the region, and
such banks have contributed to a closely connected banking sector within East Asia.
Opening of securities markets, particularly equity markets, has attracted foreign portfolio
capital inows. Active commercial bank loans and portfolio ows have linked the
economies in the region nancially, creating positive correlations of asset price
movements within East Asia. At least part of the contagion of currency crises in the region
in 1997 was a reection of such nancial linkages (Kawai, Newfarmer and Schmukler,
2003).
Macroeconomic interdependence within the region has recently become stronger, as
evidenced by a simultaneous contraction of economic activity throughout East Asia in
1998 and a simultaneous expansion in 19992000. Though the regional economies may
have been affected by some common global factors such as US economic cycles and
information technology (IT) stock price movements, many of the recent, synchronized
economic activities in the region can be attributed to strong macroeconomic
interdependence.
Cross-country correlation analyses of major macroeconomic variablessuch as real
GDP growth rates, real private consumption, real xed investment, and price ination
ratesover the last 25 years indicate that macroeconomic activities of the East
Asian economies are generally highly correlated with each other, with the exception of
China. Table 3 is a summary of correlation coefcients between the rst principal
components of East Asian economies variables and the original data for individual
economies, both inside and outside the region.
5
The table indicates that Japans real
activity variables are more highly correlated with those of emerging East Asia than
are US activity variables. On the other hand, ination rates of the United States
and Japan are equally highly correlated with those of emerging East Asia. This suggests
that the degree of emerging East Asias real economic interdependence with Japan
is greater than with the United States, while the degrees of its nominal interdependence
with Japan and the United States are equally strong. An important reason for this is
that the United States is subject to supply shocks that are different from those affecting
M. Kawai / Journal of Asian Economics 16 (2005) 2955 34
4
See Kawai (1997, 2004b), Kawai and Urata (1998, 2004), Urata (2001), Athukorala (2003), and Fukao, Ishido
and Ito (2003).
5
See Kawai and Motonishi (2004) for details.
East Asia, while it has traditionally provided a nominal anchor for East Asia through the
latters currency pegging to the US dollar.
6
2.1.4. Institutionalization of economic integration
In view of the increasing trade and FDI integration in East Asia, there is a growing need
for setting up more formal institutional mechanisms for trade and investment facilitation,
harmonization of rules, standards and procedures, and dispute settlements. The deepening
macroeconomic and nancial interdependence also suggests a need for concerted efforts to
internalize externalities and spillover effects, because macroeconomic/nancial develop-
ments and policies of one country can easily affect other countries performance and
developments. It makes sense for such interdependent regional economies to
institutionalize de facto integration through the establishment of regional frameworks
for trade and investment liberalization and macroeconomic and nancial management.
Given that one countrys turbulence, shocks and crises could be easily transmitted to other
economies within the same region, it is critical to establish nancial safety nets. Joint
M. Kawai / Journal of Asian Economics 16 (2005) 2955 35
Table 3
Correlation coefcients between the rst principal component scores for East Asia and the individual economy
data (19802002)
Countries/
regions
Real
GDP
Real
con.
Real
inv.
Real mon.
supply
Real st.
price
Real eff.
ex. rate
GDP
def.
CPI WPI
USA 0.01 0.32 0.41 0.39 0.36 0.48 0.17 0.85 0.30
EU-15 0.01 0.18 0.14 0.15 0.33 0.33 0.10 0.78 0.01
Australia 0.16 0.15 0.20 0.02 0.33 0.67 0.02 0.31 0.00
New Zealand 0.27 0.04 0.19 0.04 0.11 0.27 0.07 0.40 0.22
India 0.09 0.01 0.03 0.31 0.10 0.40 0.06 0.63 0.34
Japan 0.58 0.39 0.41 0.14 0.71 0.26 0.15 0.90 0.46
Korea 0.71 0.78 0.67 0.10 0.86 0.70 0.27 0.89 0.48
China 0.07 0.14 0.26 0.22 0.43 0.40 0.15
Taiwan 0.51 0.28 0.28 0.28 0.71 0.72 0.35 0.85 0.50
Hong Kong 0.74 0.63 0.58 0.41 0.48 0.06 0.80
Singapore 0.77 0.76 0.59 0.04 0.77 0.08 0.87 0.45
Malaysia 0.90 0.87 0.95 0.53 0.81 0.40 0.79 0.68
Thailand 0.89 0.92 0.88 0.69 0.80 0.54 0.87 0.70
Philippines 0.33 0.31 0.55 0.77 0.91 0.81 0.06 0.57 0.27
Indonesia 0.89 0.65 0.89 0.61 0.86 0.99 0.21 0.92
Notes: (a) The gures are correlation coefcients between the rst principal component scores for East Asia and
the original log rst-differenced data for individual economies.
(b) In this analysis, East Asia includes Japan, Korea, China, Taiwan, Hong Kong, Singapore, Malaysia, Thailand,
Philippines, and Indonesia.
Source: Table 5 in Kawai and Motonishi (2004).
6
Earlier studies by Eichengreen and Bayoumi (1999) found that, in terms of supply shocks, some East Asian
nations were just as closely connected with one another as European countries were. In terms of demand shocks,
ASEAN countries were also reasonably connected. See also Goto and Hamada (1994), Bayoumi and Eichengreen
(1994) and Bayoumi, Eichengreen, and Mauro (2000). Using more recent data, Kawai and Motonishi (2004)
conrm that many East Asian economies are subject to largely symmetric supply shocks.
action among such economies would be easier because they are small in numberso the
transactions cost for collective action is smalland tend to face similar shocks and similar
policy challenges.
2.2. Response to European and North American economic regionalism
The East Asian initiatives for economic regionalism represent their efforts toward
greater institutionalization of de facto economic integrationparticularly through trade
and FDI. They have made these efforts essentially for three reasons:
As a defensive response to the proliferation of regional trade arrangements (RTAs)
elsewhereparticularly in Europe and the Western Hemisphereand due to their
dissatisfaction with slow progress on trade/investment liberalization at the global and
trans-regional levels;
Due to their willingness to enhance productivity and international competitiveness
through exploitation of scale economies and dynamic efciency; and
For promotion of deeper integration and institution building at the regional level.
Regionalism elsewhereincluding the formation of an economic and monetary union
in Europe and the European Unions expansion to the east as well as the success of NAFTA
and its move to the Free Trade Area of the Americas (FTAA) in the Western Hemisphere
is the rst factor that has motivated the East Asian economies to pursue regional trade
arrangements. There had already been 184 FTAs reported to the WTO for the whole world
by 2003. Governments in East Asia fear that unless they develop their own regional trade
arrangement, they will be disadvantaged in global competition and multilateral negoti-
ations. They have increasingly realized the importance of uniting themselves to gain
bargaining power vis-a`-vis the European Union, the United States and other groupings. The
slow progress of the WTO/Doha liberalization process and the perceived ineffectiveness of
the APEC process have stoked these fears.
Policymakers in East Asia are increasingly of the view that they need to secure a bigger
market within their own region so that scale economies and dynamic efciency gains can
be exploited. They believe East Asias RTA can help raise both productivity and
international competitiveness. In addition, it can facilitate trade and investment, promote
harmonization of rules-making, standard-setting and procedures, and provide dispute
resolution mechanisms, particularly in the areas of services, labor mobility, investment,
competition policy, intellectual property rights, contingency protection and rules of
originareas in which it is difcult to make substantial progress in a multilateral
framework (OECD, 2003). This effort is basically one of institution building for further
deepening of trade and investment integration.
2.3. Response to the nancial crisis
While the most fundamental driving force behind the recent move to closer economic
regionalismin the money/nance area is the deepening of economic interdependence in the
M. Kawai / Journal of Asian Economics 16 (2005) 2955 36
region, the impact of the Asian nancial crisis cannot be neglected. There are also several
other reasons for recent nancial cooperation in the region:
The hard lesson learned from the Asian nancial crisis of 19971998, i.e., the need to
establish regional self-help mechanisms for effective prevention, management and
resolution of regional nancial crises;
Dissatisfaction with the existing global nancial arrangement governed by the IMF; and
Regional nancial stability as a basis for global nancial stability as well as the regions
willingness to increase the Asian voice in, and for, global nancial management.
The Asian nancial crisis has taught the important lesson that there is a clear need for
effective prevention, management and resolution of nancial crises and contagion. The
global initiative for the new international nancial architecture that intends to strengthen
the international nancial system in this regard has been unsatisfactory and disappointing.
7
The national efforts to strengthen individual economic fundamentals, to reduce the lik-
elihood of home-grown crises and to increase domestic resilience to crises and contagion
particularly through the ROSCstake time to bear fruit.
8
In addition, the East Asian
economies have been dissatised with the way the IMF handled the crisis, particularly in
Thailand and Indonesia. Hence, the general sentiment in East Asia has been that the
regional economies must establish their own self-help mechanisms through systematic
macroeconomic and nancial cooperation for prevention and management of possible
crises in the future. Such cooperation should include information exchange, policy dia-
logue, a regional liquidity support arrangement, nancial sector development, and joint
policymaking in certain critical areas, such as exchange rate policy coordination.
There are some proactive responses to the crisis. Since regional nancial stability is a
basis for global nancial stability, effective regional nancial cooperation is an obvious
benet not only for the regional economies but also for the global community. In this sense
East Asian regional nancial cooperation is consistent with, and even strengthens, the
IMFs global role. At the same time, given the perceived imbalance and unfairness in the
current distribution of IMF quotas, which is unrealistically skewed against East Asia,
regional policymakers have a sincere desire to make their voice heard in global nancial
management. Indeed they believe they can play a greater role by joining their forces
together.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 37
7
See Eichengreen (1999) and Kenen (2001) for assessments of the newinternational nancial architecture. Bird
and Rajan (2002), Kawai (2002a) and Kuroda and Kawai (2002) provide rationales behind the recent drive to
strengthen East Asias nancial architecture.
8
One of the principal tools for strengthening national policies and institutions has been the development of
international best practices in macroeconomic policy areas, nancial sector regulation and supervision, and
capital market infrastructure. These best practices are presented by the Reports on the Observance of Standards
and Codes (ROSCs), which cover 12 areas: macroeconomic policy areamonetary and nancial policy
transparency, scal transparency, and special data dissemination standard (SDDS) in addition to the general
data dissemination system (GDDS); nancial sector regulation and supervisionbanking supervision, securities
regulation, insurance supervision, payments systems, and anti-money laundering; and capital market infrastruc-
turecorporate governance, accounting standards, auditing standards, and insolvency and creditor rights. An
important instrument is the Financial Sector Assessment Program (FSAP) supported jointly by the IMF and the
World Bank.
3. Initiatives for economic regionalism
3.1. Early attempts
3.1.1. EAEG/EAEC proposal
Following the unsatisfactory progress of the Uruguay Round Ministerial meeting in
December 1990, Malaysian Prime Minister Mohamad Mahathir proposed the formation
of a regional trade groupingcomprised of ASEAN countries, Japan, China, Korea and
Hong Kong. This group of economies was called the East Asian Economic Group
(EAEG). The objectives behind his proposal were to establish a regional trade
arrangement for the group in response to the emergence of preferential regional trade
arrangements elsewhere, including in North America, and to exercise a global impact on
trade issues, like the Cairns Group. In October 1991, ASEAN Economic Ministers
considered Mahathirs proposal as useful and renamed the grouping as the East Asian
Economic Caucus (EAEC) which would facilitate discussions on regional economic
issues.
However, the United States objected to the EAEG/EAEC proposal on the grounds that
it could divide the Asia-Pacic regions, by excluding the United States, and reduce the
effectiveness of the trade/investment liberalization process within APEC. Japan
hesitated to support the proposal because of its consideration of US oppositionJapan
had trade conicts with the United States and did not wish to make the bilateral
relationship worseas well as because of the strategic priority it placed on the APEC
process. China also took a cautious approach. Interest in the EAEG/EAEC proposal
waned eventually in the absence of support from key countries in Northeast Asia.
9
But
when the leaders of Japan, China and Korea were invited to the informal ASEAN
Leaders meeting in December 1997, in the midst of the Asian nancial crisis, the de
facto ASEAN + 3 process began. Hence, the EAEG/EAEC proposal can be considered a
precursor to the ASEAN + 3 process, because membership of the latter overlaps that of
the former.
3.1.2. Asian Monetary Fund (AMF) proposal
Following the success of the August 1997 meeting in Tokyo to agree on a much-needed
nancial support package for crisis-affected Thailand, Japan, with support from South
Korea and the ASEAN countries that participated in the Thai package, proposed in
September to establish an Asian Monetary Fund (AMF) to supplement IMF resources for
crisis prevention and resolution. Its idea was to pool foreign exchange reserves of the East
Asian economies that can be mobilized to deter currency speculation or to contain a
currency crisis in a member economy. It was said that as much as US$ 100 billion would be
mobilized. The United States and the IMF opposed this proposition on grounds of moral
hazard and duplication. They argued that an East Asian country hit by a currency crisis
would bypass the tough conditionality of the IMF and receive easy money from the AMF,
thereby creating potential for moral hazard; and that an AMF would be redundant in the
M. Kawai / Journal of Asian Economics 16 (2005) 2955 38
9
Nonetheless, this proposal was not completely forgotten. When the Asia-Europe Meeting (ASEM) was
created in 1996, the Asian participants were essentially EAEG/EAEC economies.
presence of an effective global crisis manager, the IMF. Without Chinas support, the idea
had to be aborted.
10
3.1.3. New Miyazawa Initiative
Another example, which was highly successful, was the so-called New Miyazawa
Initiative which contributed to the resolution of the Asian nancial crisis. In October
1998, Japan pledged US$ 30 billion to support the economic recovery of the crisis-affected
countries. Half of the pledged amount was dedicated to short-term nancial needs during
the process of implementing economic restructuring and reform, while the rest was
earmarked for medium- and long-term reforms. Part of short-term nancial support was
dedicated to currency swap arrangements with Korea (US$ 5.0 billion) and Malaysia (US$
2.5 billion). The initiative provided major assistance for restructuring corporate debt,
reforming nancial sectors, strengthening social safety nets, generating employment, and
addressing the credit crunch. A commitment to provide a large amount of resources helped
stabilize the regional markets and economies, thereby facilitating the recovery process.
It is important to mention that the short-term nancial support provided to Korea and
Malaysia became a model for bilateral currency swap arrangements under the Chiang Mai
Initiative.
3.2. Trade and investment initiatives
3.2.1. Moves for sub-regional and bilateral FTAs
Recently, many governments in East Asia have promoted bilateral and sub-regional
trade arrangements. Notably, Japan recently implemented a bilateral economic partnership
agreement (EPA) with Singapore in November 2002,
11
and has concluded another one with
Mexico. In response to the JapanSingapore negotiation, China and ASEAN began ofcial
negotiations to complete a free trade agreement (FTA) by 2010 with advanced ASEAN
members and by 2015 with less advanced members. They have already implemented the
early harvest measures since January 2004.
12
Japan and ASEAN agreed to begin
negotiations in 2005 on an EPAwith a view to achieve free trade by 2012. Korea has also
M. Kawai / Journal of Asian Economics 16 (2005) 2955 39
10
In November 1997 the East Asian economies, together with the United States, Canada, Australia and New
Zealand, agreed to establish the so-called Manila Framework Group. Many, but not all, of the MFG member
economies had participated in the Thai nancial package. Its objective was to develop a concerted framework for
Asia-Pacic nancial cooperation in order to restore and enhance the prospects for nancial stability in the region.
Its initiatives included the establishment of a new mechanism for regional surveillance to complement IMF
surveillance; enhancement of economic and technical cooperation, particularly in strengthening domestic
nancial systems and regulatory capacities; strengthening the IMFs capacity to respond to nancial crises;
and development of a cooperative nancing arrangement for the region to complement IMF resources. However,
the MFG was terminated in December 2004 after 7 years of meetings among nance ministry and central bank
deputies.
11
More precisely, the JapanSingapore agreement is called the Agreement between Japan and the Republic of
Singapore for a New-Age Economic Partnership (JSEPA) and goes beyond a conventional free trade agreement.
12
Early harvest refers to provisions of the Framework Agreement on ChinaASEAN Comprehensive
Economic Cooperation, intended to liberalize, before the full completion of the FTA, tariffs in priority sectors of
interest and implement other trade and investment facilitation deemed to generate immediate benets to ASEAN
and China.
agreed on a similar negotiation with ASEAN to be completed by 2009. Japan has begun
bilateral negotiations for EPAs with Korea, Malaysia, Thailand, and the Philippinesit
will also begin negotiations with Indonesia. In this sense, there have been domino and
bandwagon effects among Japan, China and Korea in their competitive drive for regional
FTAs/EPAs with ASEAN. China has also proposed an FTAamong China, Japan and Korea.
A region-wide FTA for ASEAN + 3, including China, Japan and Korea, has also been
proposed.
13
Table 4 summarizes the recent initiatives for FTAs and EPAs by the East Asian
economies.
3.2.2. Features of recent initiatives
One of the interesting features of the East Asian drive toward regional and bilateral trade
arrangements is that these economies have also concluded, or have been negotiating, FTAs/
EPAs with countries or groups outside of East Asia. For example, Japan has concluded
negotiations with Mexico. Korea has put into effect its FTA with Chile. Singapore has
implemented a closer economic partnership agreement (CEPA) with New Zealand and
Australia as well as FTAs with the European Free Trade Area (EFTA) and the United
States. It is currently negotiating with Mexico and Canada. Thailand implemented an FTA
with Australia and is negotiating one with the United States and with India. ASEAN as a
M. Kawai / Journal of Asian Economics 16 (2005) 2955 40
Table 4
FTA/EPA initiatives in East Asia (as of September 2004)
In effect Under ofcial negotiation Under consultation/study
Bangkok Treaty (1976) ChinaASEAN ChinaNew Zealand
LaosThailand (1991) Hong KongNew Zealand ChinaAustralia
ASEAN FTA (1992) JapanMexico
(signed in September 2004)
JapanAustralia
SingaporeNew Zealand (January 2001)
JapanKorea
JapanASEAN
JapanSingapore (November 2002)
JapanThailand
JapanIndonesia
SingaporeAustralia (2003)
JapanPhilippines (almost concluded)
JapanChinaKorea
SingaporeEFTA (January 2003)
JapanMalaysia
JapanChile
SingaporeUSA (January 2004)
KoreaSingapore (concluded)
KoreaASEAN
ChinaHong Kong (January 2004)
SingaporeCanada
KoreaMexico
ChinaMacao (January 2004)
SingaporeMexico
SingaporeTaiwan
KoreaChile (April 2004)
Singapore-P3 (Aus, Chile, NZ)
ASEANCER (Aus, NZ)
TaiwanPanama (2004)
SingaporeIndia
ASEANEU
ThailandAustralia (January 2005)
SingaporeJordan
ASEAN (bilateral)USA
ThailandBahrain
ThailandIndia
ThailandUSA
ThailandPeru
ASEANIndia
Notes: The shaded arrangements are those within East Asia (ASEAN + 3, Taiwan and Hong Kong).
Source: Table 1.7 in Fukasaku, Kawai, Plummer and Trzeciak-Duval (2005).
13
However, no timeframe is set for negotiations. Japan is indeed cautious about such an arrangement with China
at this point. Its ofcial view is that, before negotiating an FTA/EPA, China must clearly show its compliance with
all the commitments made in WTO accession negotiations.
group has begun negotiations with India and is also considering similar negotiations with
the United States and the European Union. These attempts suggest that the economies in
the region wish to maintain open trading relations with other parts of the world rather than
become inward-looking.
East Asias move to regional trade arrangements symbolizes a change in its long-
standing policy of pursuing trade liberalization only in a global or trans-regional
framework based on the WTO and APECapart from ASEAN which has formed the
ASEANFree Trade Area (AFTA). The region has decided to shift its trade policy to a three-
track approach based on global (WTO-based) cum trans-regional (APEC-based), regional
(within ASEAN + 3), and bilateral liberalization. For East Asian economies, regional and
bilateral liberalization is an attempt to achieve deeper integration with their trading
partners on a formal basis, going beyond reductions in border restrictionsi.e., pursuing
investment liberalization, promoting greater competition in the domestic market, and
harmonizing standards and procedures.
3.3. Three pillars of nancial regionalism
The East Asian economies have also embarked on initiatives for regional nancial
arrangements. Such initiatives are founded on three major pillars:
Creation of a regional liquidity support facility through the Chiang Mai Initiative;
Establishment of economic surveillance, particularly through the ASEAN + 3 Economic
Review and Policy Dialogue process; and
Development of Asian bond markets.
3.3.1. Liquidity support facility
The hallmark liquidity support facility in East Asia is the Chiang Mai Initiative (CMI),
which is designed to reduce the risk of liquidity crises or manage regional currency attacks,
contagion and crises. The Asian nancial crisis highlighted the importance of establishing
an effective nancing facility so that the economies in the region can prevent currency
crises or respond effectively to crises once they occur in a world of increased nancial
globalization. The nance ministers of ASEAN + 3 who met in Chiang Mai in May 2000
agreed to set up a regional network of swap arrangements for its members, thus embarking
on the so-called the Chiang Mai Initiative (CMI).
14
The CMI is comprised of two
elementsthe expansion of the existing ASEAN Swap Arrangement (ASA), in both
amounts and membership, and the creation of a new network of bilateral swap
arrangements (BSAs) among ASEAN + 3 members.
15
By the end of December 2003, 16
BSAs had been concluded in line with the main principles, amounting to a total of
US$ 36.5 billion excluding the commitments made under the New Miyazawa Initiative,
M. Kawai / Journal of Asian Economics 16 (2005) 2955 41
14
ASEAN + 3 was formed in April 1999. Stubbs (2002) believes that the ASEAN + 3 group will rise as a major
regional and international player. See Kawai (2002a) and Kuroda and Kawai (2002).
15
The ASEAN Swap Arrangement (ASA), established among the members of the original ASEAN-5 in August
1977 with a total facility of US$ 100 million, was augmented to a total of US$ 200 million in 1978. Under the
CMI, ASA membership was extended to include all ASEAN members, and its facility was further augmented to
US$ 1 billion.
and US$ 44 billion including these commitments (Table 5).
16
This signied the
conclusion of all conceivable BSAs at the time, and no further BSA negotiation is currently
under way.
One of the important features of CMI BSA is that members requesting liquidity support
can immediately obtain short-term nancial assistance for the rst 10% of the facility. The
remaining 90% is provided to the requesting member under an IMF program. Linking CMI
liquidity support to an IMF programand hence its conditionalityis designed to address
the concern that balance of payments difculties may be due to fundamental problems,
rather than a mere panic and herd behavior by investors, and that the potential moral hazard
problem could be non-negligible in the absence of tough IMF conditionality. The general
view is that, due to the regions limited capacity to produce and enforce effective
adjustment policies, the CMI members will have to rely on the IMF, at least for the time
being.
17
3.3.2. Surveillance mechanism
Establishing processes for regional economic surveillance and policy dialogue is an
obvious rst step for meaningful nancial cooperation. Economic surveillance involves not
M. Kawai / Journal of Asian Economics 16 (2005) 2955 42
Table 5
Progress on BSAs under the Chiang Mai Initiative (as of end-December 2003)
BSAs Currencies Conclusion dates Size
JapanSouth Korea USDWon July 4, 2001 US$ 7.0 billion
a
(1-way)
JapanThailand USDBaht July 30, 2001 US$ 3.0 billion (1-way)
JapanPhilippines USDPeso August 27, 2001 US$ 3.0 billion (1-way)
JapanMalaysia USDRinggit October 5, 2001 US$ 3.5 billion
b
(1-way)
ChinaThailand USDBaht December 6, 2001 US$ 2.0 billion (1-way)
JapanChina YenRenminbi March 28, 2002 US$ 3.0 billion
c
(2-way)
ChinaSouth Korea RenminbiWon June 24, 2002 US$ 2.0 billion
c
(2-way)
South KoreaThailand USDWon or USDBaht June 25, 2002 US$ 1.0 billion (2-way)
South KoreaMalaysia USDWon or USDRinggit July 26, 2002 US$ 1.0 billion (2-way)
South KoreaPhilippines USDWon or USDPeso August 9, 2002 US$ 1.0 billion (2-way)
ChinaMalaysia USDRinggit October 9, 2002 US$ 1.5 billion (1-way)
JapanIndonesia USDRupiah February 17, 2003 US$ 3.0 billion (1-way)
ChinaPhilippines RenminbiPeso August 29, 2003 US$ 1.0 billion
c
(1-way)
JapanSingapore USDSingapore dollar November 10, 2003 US$ 1.0 billion (1-way)
South KoreaIndonesia USDWon or USDRupiah December 24, 2003 US$ 1.0 billion (1-way)
ChinaIndonesia USDRupiah December 30, 2003 US$ 1.0 billion (2-way)
a
The amount includes US$5.0 billion committed (on June 17, 1999) under the New Miyazawa Initiative.
b
The amount includes US$2.5 billion committed (on August 18, 1999) under the New Miyazawa Initiative.
c
The amounts are US dollar equivalents.
16
For calculation purposes, the amounts of two-way BSAs are doubled. The amount that Japan committed under
the New Miyazawa Initiative totals US$ 7.5 billionor US$ 5 billion with South Korea and US$ 2.5 billion with
Malaysia. Note that Brunei, Cambodia, Laos, Myanmar and Vietnam are not part of BSAs, though they are ASA
members. The JapanThailand BSA is expected to become a two-way arrangement; then the total amount of CMI
BSAs will be US$ 47 billion including the New Miyazawa Initiative commitments.
17
On the other hand, some ASEAN + 3 members, such as Malaysia, believe that the CMI should not be linked to
IMF programs.
only analyses of macroeconomic and nancial conditions and policies of member
economies but also identication of vulnerable aspects of the economy and nance as well
as appropriate policy responses. This process requires frank and candid exchanges of views
and policy discussions among member economies, and will hopefully induce good policies
through peer pressure.
There are several mechanisms for regional information sharing, policy dialogue,
and economic surveillance. ASEAN + 3 nance ministers agreed in May 2000 to
introduce an ASEAN + 3 Economic Review and Policy Dialogue (ERPD) process,
which turned out to be the most important mechanism of all.
18
Its rst surveillance
meeting was held in April 2002. The purpose of this process is to strengthen policy
dialogue, coordination and collaboration on the nancial, monetary and scal issues of
common interest. Its primary focus is on global, regional and national economic
monitoring, macroeconomic risk assessment and management, and banking and
nancial system conditions. Steps have been taken for cooperation in monitoring short-
tem capital ows and developing a regional early-warning system to assess regional
nancial vulnerabilities, with a view to preventing nancial crises in the future.
However, this process has not yet been as effective as it should be. There is no clear
linkage between surveillance and CMI. There is no independent, professional
organization that prepares comprehensive analyses or assessments or identies issues
for discussion.
19
3.3.3. Asian bond market development
Initiatives have been taken to develop Asian bond markets in viewof the need to channel
a vast pool of savings to long-term investment for growth and development within the
region. This effort reects the recognition that the nancial system in East Asia has been
too dependent on bank nancing domestically and on foreign-currency nancing
externally and, hence, needs to be strengthened through the development of national and
regional capital, in particular of bond, markets. Development of well-functioning, local-
currency denominated bond markets is expected to reduce incentives for banks and
corporations to rely on bank nancing and/or external borrowing. It is expected to mitigate
the double mismatch problem of international capital marketsi.e., of currency and
maturity mismatches.
The EMEAP-led central bank process established an Asian Bond Fund (ABF) in June
2003 to facilitate bond issuance. The idea was to help expand the bond market through the
purchase of sovereign or quasi-sovereign bonds using foreign exchange reserves. So far,
only US dollar-denominated bonds have been purchased. Given the recognition that local-
currency denominated bonds need to be promoted in order to address the issue of the
double mismatch, the central bankers have introduced ABF-2 (December 2004), which
involves purchases of Asian-currency denominated bonds. The ASEAN + 3 Finance
M. Kawai / Journal of Asian Economics 16 (2005) 2955 43
18
Other major mechanisms include the ASEAN Surveillance Process, EMEAP (Executives Meeting of East
Asia-Pacic Central Banks), and trans-regional forums such as Asia-Pacic Economic Cooperation (APEC) and
AsiaEurope Meeting (ASEM).
19
The Asian Development Bank provides some data on developing member economies. The IMF used to play
the role of a secretariat for the MFG.
Minister process has undertaken the Asian Bond Market Initiative (ABMI) to develop local
currency denominated bonds since August 2003. One of its aims is to establish a market
infrastructure for bond market developmentincluding the establishment of a regional
bond guarantee agency, the strengthening of regional rating agencies and the promotion of
secondary marketsand to encourage bond issues denominated in a basket of Asian
currencies.
3.4. East Asian Economic Community
One of the recent, most signicant developments is the agreement by East Asian Leaders
in Vientiane in November 2004 that they would make efforts to form an East Asian
Community and hold an East Asian Summit for this purpose. The idea of creating an East
Asian Community was proposed earlier by East Asia Vision Group (2001). The Vision
Group recommended: (a) economic cooperation; (b) nancial cooperation; (c) political and
security cooperation; (d) environmental cooperation; (e) social and cultural cooperation; and
(f) institutional cooperation. A core component of these recommendation that is relevant to
trade/investment integration and regional nancial management is (a) and (b).
Economic cooperation includes:
Establishment of the East Asian Free Trade Area and liberalization of trade well ahead of
the APEC Bogor Goal;
Expansion of the Framework Agreement on an ASEAN Investment Area to all of East
Asia;
Promotion of development and technological cooperation among regional countries,
particularly to provide assistance to less developed countries; and
Realization of a knowledge-based economy and the establishment of future-oriented
economic structure.
Financial cooperation includes:
Establishment of a self-help regional facility for nancial cooperation;
Adoption of a better exchange rate coordination mechanism consistent with both
nancial stability and economic development; and
Strengthening of the regional monitoring and surveillance process within East Asia to
supplement IMF global surveillance and Article IV consultation measures.
The Vision Group essentially envisioned the progressive integration of the East Asian
economies, ultimately leading to an East Asian Economic Community. Once a region-wide
FTA is formed and institutions for regional nancial management and exchange rate
coordination are established, the basic foundation of an East Asian Economic Community
will have been provided. Thus the Vision Group offered an important long-term vision of
the economic future of East Asia.
The ASEAN + 3 government ofcials responded to the Vision Groups recommenda-
tions by submitting their report to the ASEAN + 3 Summit meeting (East Asia Study
Group, 2002). They took most of the recommendations and laid out some concrete
M. Kawai / Journal of Asian Economics 16 (2005) 2955 44
implementable measures in the short run as well as some goals in the medium and long
term. The following statements summarize their views:
East Asian cooperation is inevitable and necessary;
Deeper integration of an East Asian community is benecial and desirable; and
Integration in East Asia will evolve over time as the coherence, efciency, and progress
of the ASEAN + 3 framework are consolidated.
4. Challenges for closer economic regionalism in East Asia
4.1. Strategy toward closer economic regionalism
4.1.1. Creation of an East Asia-wide FTA
If an East Asian Economic Community is to be created, the region must become a single
market. A starting point for this would be to establish a single East Asia-wide FTA, which
should evolve to an East Asian customs union and a common market. Various estimates
reveal that the regional economies can reap large benets from an ASEAN + 3 FTA.
20
Establishing a single East Asia-wide FTA, however, is no easy task once there is a
proliferation of many different FTAs/EPAs in the region. Each FTA/EPA may have
different external tariffs, exclusion lists and rules of origin. One challenge is how to avoid
the so-called spaghetti bowl effect by ensuring consistency across different trade
arrangements. To make the task easier, each FTA/EPA should have transparent, simple
rules with regard to external tariffs, exclusion lists, rules of origin, and harmonization of
standards, procedures and regulations. Convergence towards identical rules and common
tariff rates, rules and standards is highly desirable.
4.1.2. Closer nancial regionalism
The ASEAN + 3 countries have been reviewing the CMI since May 2004, including the
amount, modality and IMF linkages. The total amount covered by the CMI is limited in
view of the potential size of speculative capital ows and, hence, should be raised
substantially perhaps by as much as ten times the current commitment. Over the medium
term, its bilateral nature may be modied to become centralized and multilateral in order to
make its joint activation effective and prompt in the event of a crisis.
21
Again over the
medium term, the degree of the CMIs linkage to IMF programs may be reduced or even
eliminated as the quality of economic surveillance is improved. In this sense, CMI and
surveillance are inter-linked. Over the short term, the central issue is how to improve the
effectiveness and quality of surveillance within ASEAN + 3, along the line of the G-7, the
European Union (Monetary Committee and ECOFIN) and OECD processes (Economic
Policy Committee, Economic Development and Review Committee, and Working Party
No. 3).
22
One way to strengthen regional surveillance would be to set up a competent
M. Kawai / Journal of Asian Economics 16 (2005) 2955 45
20
See, for example, Scollay and Gilbert (2001, 2003) and Pangestu and Gooptu (2003).
21
Rajan and Siregar (2004) propose to establish a centralized reserve pooling system.
22
See Girardin (2004) for issues on surveillance within the framework of ASEAN + 3.
Secretariat, whose primary role would be to assist the ASEAN + 3 surveillance process by
providing high-quality and in-depth economic reviews and assessments, timely
identication of emerging issues and vulnerabilities affecting the region, and effective
policy advice. This secretariat must have adequate professional staff to monitor regional
capital ows and nancial and exchange market developments, update early warning
indicators, and analyze regional and country economic conditions.
To develop Asian-currency denominated bond markets, sufcient incentives must be
created on the part of both investors and issuers. Corporate governance of potential issuers
needs to be enhanced, and well-designed national and regional market infrastructure needs
to be developed, including disclosure requirements, accounting and auditing standards,
rating agencies, depository and clearance systems and insolvency procedures for bond
defaults. An important challenge will be how to strike the right balance between the
efcient development of local-currency bond markets and the effective management of
capital accounts. The reason for this is that well-functioning bond markets would require
an open capital account, which can be an important source of nancial instability for
emerging market economies.
4.1.3. Exchange rate policy coordination
A variety of exchange rate regimes exist in East Asia, but no concrete steps have been
taken so far to initiate exchange rate policy coordination. Given a rising degree of
economic interdependence among the East Asian economies through trade, investment and
nancial ows, it is increasingly important to maintain intra-regional exchange rate
stability, which requires closer policy coordination among the nancial and monetary
authorities in the region. One countrys exchange rate adjustment can have serious,
competitive implications for neighboring economieshence the need for coordination on
exchange rate policies. Essentially, intra-regional exchange rate stability is a public good
for regional growth and economic stability. Another reason for regional policy
coordination is the fact that crisis contagion tends to be concentrated, and economic
spill-overs tend to be signicant, within a region.
East Asias exchange rate policy coordination may evolve in three stages:
23
Loose policy coordination: information coordination, initial institutional coordination,
and resource coordination;
Tight policy coordination: macroeconomic and exchange rate policy coordination for
intra-regional exchange rate stabilization; and
Complete policy coordination: economic and monetary union with a single currency.
First, regional policymakers can strengthen information coordination, particularly on
policy dialogue and surveillance. This dialogue should focus on exchange market deve-
lopments, capital ows, foreign exchange reserves, and monetary, scal and exchange rate
policies. In the current context, the regional authorities need to discuss such issues as foreign
exchange reserve management, impact of a possible exit of the Chinese RMBfroma USdollar
peg, and policies to facilitate smooth adjustments of trans-Pacic payments imbalances.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 46
23
See Montiel (2004) for an excellent review.
Policymakers should begin institutional coordination, including the creation of a
regional common unit of account, or the Asian Currency Unit (ACU), and the adoption of a
G-3 currency basket system. The ACU can be created by constructing a basket of regional
currencies that include 13 currencies for ASEAN + 3. Just like the European Currency Unit
(ECU) under the EMS (19791998), the weights of the regional currencies would reect
the relative importance of the countries in the region. The ACU could be used to
denominate economic transactions (current and capital accounts) and asset stocks (foreign
exchange reserves and cross-border bonds) and to measure the degree of each currencys
exchange rate deviation from the regional average. In addition, the emerging economies in
East Asia may adopt a common G-3 currency basket system. Because of their increasingly
interdependent nature, a certain degree of intra-regional exchange rate stability is clearly
desirable for these economies, while at the same time maintaining extra-regional exchange
rate stability is also important. These can be achieved by each individual economy using a
common basket of G-3 currenciesthe US dollar, the euro and the Japanese yenas a
reference for exchange rate stabilization. Given their diverse economic relationships with
the United States, Japan and the European Union, the regions economies would be able to
achieve a reasonable degree of exchange rate stability, on an effective basis, by adopting a
well-balanced G-3 currency basket which would provide a better buffer to an economy due
to yen/dollar and yen/euro rate volatility.
24
The degree of exchange rate stabilization can be
left to each economys specic conditions and preferences. Adoption of a common
currency basket within emerging East Asiaand loosely or tightly stabilizing each
exchange rate to such a basketwould provide the benet of achieving relative stability of
intra-regional as well as extra-regional exchange rates.
25
Before moving to the second stage, the regions policymakers may consider
strengthening resource coordination, which involves expanding the CMI into a centralized,
multilaterally administered arrangement with substantially larger stocks of resources than
are presently available. This expanded reserve pooling arrangement will be increasingly
independent of IMF programs and, hence, require alternative conditionality to be
developed for currency crises. With a centrally administered CMI that has its own
M. Kawai / Journal of Asian Economics 16 (2005) 2955 47
24
In the post-crisis period, Korea and Thailand appear to be shifting to a de facto currency basket system, a la
Singapore (Kawai, 2002b). McKinnon (2000, 2004), however, takes the view that the East Asian economies have
resurrected the US dollar standard system. See Kawai (2004a) and Kawai and Takagi (2005) who aruge for the
adoption of a G-3 currency basket system. Several papers in Asian Development Bank (2004), including
Eichengreen (2004b), advocate oating exchange rates.
25
This approach is consistent with what Goldstein (2002) calls managed oating plus. Amanaged oat is a
system with occasional intervention to limit excessive short-term uctuations in exchange rates without a publicly
announced exchange rate target, and a plus is ination targeting and aggressive measures to reduce currency
mismatches. Our approach is to adopt a G-3 currency basket as an exchange rate reference in the context of
managed oating plus, a la Williamson (1999, 2000, 2001). See also Hernandez and Montiel (2003). Even
when a G-3 currency basket system is desirable for the region as a whole, however, it may not be easy for any
single economy to move unilaterally away from the current, US dollar-centered exchange rate arrangement to a
new arrangement in which the relative weight of the dollar is smaller and that of the yen and euro larger. When
neighboring countries stabilize their exchange rates primarily against the US dollar, there may not be much
incentive for any one country to unilaterally alter its exchange rate policy, which demonstrates a potential
collective action problem associated with a move to a G-3 currency basket arrangement (Ogawa & Ito, 2002).
Overcoming this problem requires a concerted move among the economies concerned.
secretariat, the ASEAN + 3 countries will have effectively established an Asian Monetary
Fund (AMF). The region should be in a position to address the earlier concern that an AMF
that could lend too generously with too little conditionality might create a moral hazard for
the government at the receiving end as well as for investors with stakes in the countries in
question.
26
It is therefore essential to improve economic surveillance, acquire capacity to
formulate independent adjustment policy in the event of a liquidity crisis and, to the extent
necessary, enforce effective private sector involvement.
Second, as the region becomes more integrated, exhibits greater economic and political
convergence, and, hence, is better prepared to make a more permanent commitment to
economic policy coordination, more formal institutions capable of supporting intra-
regional exchange rate stability need to be built. In the second stage of exchange rate policy
coordination, a realistic approach is a multi-track approach where several groups of
economies in East Asialike Japan and Korea, or Singapore, Malaysia and Bruneithat
are close enough may initiate sub-regional currency stabilization schemes a la the
European Snake or ERM. This approach might be more realistic because economies that
are ready can go ahead for closer monetary and exchange rate policy coordination, and
latecomers will gradually catch up with the forerunners. To help sustain this approach,
systematic macroeconomic policy coordination is essentialparticularly monetary and
scal policy rulesto make the stabilization scheme credible.
Finally, in the last stage the region may establish an economic and monetary union with
a common currency, like the euro regime. A common currency arrangement, however,
cannot be expected in the very near future because of the lack of political commitments, of
political and economic convergence, and of deeper complementary institutions.
27
Such an
arrangement would require member economies readiness to accept complete coordination
of monetary policyand closer coordination of other economic policieslong before its
implementation.
4.2. Overcoming impediments to closer economic regionalism
4.2.1. Impediments to closer economic regionalism
There are four possible impediments to deepening economic integration and advancing
economic regionalism in East Asia:
28
East Asias global orientation in trade, FDI, money and nancespecically, its
openness to North America and Europe;
Concern about possible conict with global economic systems governed by the WTO
and the IMFnamely, the regions fear of encountering discrimination, trade and FDI
diversion and proliferation of nancial crises;
Diversity and heterogeneity in economic, nancial and social developments within East
Asiaincluding differences in per capita incomes, industrial and nancial structures,
and domestic institutional and human capacities;
Lack of political consensus and mutual trust for closer economic regionalism.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 48
26
Nonetheless, Rapkin (2001) takes a pessimistic view of an AMF.
27
See Wyplosz (2004) for the importance of institutional integration for a currency union.
28
See Eichengreen (2004a) for some of these difculties.
Skeptics might argue that East Asia is more closely integrated with the United States
and Europe than with regional economies and that the region can gain more from further
integration with the global market than with the regional market. Hence, forming an East
Asia-wide FTA, with the United States and Europe excluded, is not a commendable idea
because they are still important markets for the regions nal products. The belief is that
the expansion of intra-regional trade in East Asia, supported by FDI, has been made
possible by open markets in the United States and Europe that have been absorbing
East Asian nished products. In the area of money and nance, the regions global
orientation provides greater risk sharing for smooth consumption. The regions econ-
omies are also still highly dependent on the US dollar for exchange rate stabilization,
trade invoicing, external asset denomination, foreign exchange reserve holding, and
external liabilities.
The corollary of this view would be that global frameworks of trade/investment
liberalization and of international nancial management would be more important for
East Asia than are regional frameworks. This implies that trade and investment
liberalization within the WTO, or at least within APEC, would be more desirable
than through an East Asian FTA. This argument tends to be supported by those who
cast doubt about East Asian trade regionalism because it might undermine the WTO
principle of maintaining a liberal, non-discriminatory, and multilateral trading
system.
29
It also implies that international nancial management under the IMFs
umbrella, rather than under a regional nancial arrangement, would be more benecial
to East Asia.
One of the most serious challenges is that the East Asian economies are quite diverse
and varied in their economic systems and stages of nancial and social developments
such as per capita income levels, industrial and nancial structures, trade openness
and patterns, scope and extent of exchange and capital controls, institutional and
human capacities, and various social conditions.
30
Diversity and heterogeneity
imply that low-income countrieswhere market infrastructure is insufciently
developedwill be slow in trade, investment and nancial liberalization and market
opening and, hence, it will be difcult for these nations to integrate themselves quickly
with the rest of East Asia. This constitutes an obvious impediment to economic
regionalism for the whole of East Asia. In addition, given such economic diversity and
heterogeneity, economies in the region have different policy objectives and priorities and
desire to maintain national sovereignty over economic policies. In order for the
governments to take joint action at the regional level, there must be substantial economic
convergence.
Finally, one might argue that there is no political consensus for economic integration
within East Asia due to differences in political systems, history issues and the lack of
mutual trust. No single economic power plays a dominant role in East Asia similar to that of
M. Kawai / Journal of Asian Economics 16 (2005) 2955 49
29
Lloyd (2002) argues that bilateralism/FTAs will likely lead toward, and not impede, multilateralism, while
Brown, Deardorff, and Stern (2003) continue to believe in superiority of multilateralism.
30
Ravenhill (2001) argues that diversity of membership and conicts of power and interest sharply limit the
potential for cooperation in East Asia, while Terada (2003) provides a constructive and relatively optimistic
account of the regional grouping.
the United States in the Western Hemisphere, nor does any bipolar relationship exist
similar to the Franco-German alliance in Western Europe. Japan has been mired in
economic stagnation over the last decade and China, while recently emerging as an
economic power, has yet to achieve transition to a market economy and, more funda-
mentally, political transition.
4.2.2. Assessments of the impediments
It is useful to point out that some of these impediments are real, but they are not
insurmountable. There is no doubt that global frameworks for trade/investment
liberalization (WTO) and international nancial management (IMF) remain important.
Yet there is room for regional frameworks to play complementary roles. In the area of
trade and investment, the United States is no longer the most dominant economic
partner for many East Asian economies, and the regional markets for nal products
are expanding fast. A large share of inward FDI ows in East Asia now originates from
within the region. In addition, East Asia is in no way inward looking as evidenced by the
fact that many regional governments are negotiating FTAs with countries outside of the
region and are at the same time focusing on domestic structural reforms, higher
productivity and economic growth, thus minimizing trade diversion effects. The East
Asian approach is to regard the WTO principleand APEC principlesas the basic
infrastructure for international trade rules and achieve greater liberalization beyond the
commitments of the WTO and APECcalled the WTO-plus or APEC-plus
approach.
In the area of money and nance, regional policymakers have found it absolutely
necessary to manage nancial globalization through various measures, including the
strengthening of a regional nancial architecture. They have also found the cost of
excessive reliance on the US dollar to be very high, so that they have embarked on
measures to increase the use of regional currencies through such initiatives as Asian bond
market development. These regional efforts are not a substitute for, but a complement of,
global and national efforts for crisis prevention, management and resolution.
Diversity and heterogeneity are not the ultimate impediments to economic regionalism,
but a lack of political will could be. One clear observation is that, despite heterogeneity and
differences in economic, political and social systems among the countries in the region,
they have increasingly come to realize that the economic logic for strengthening regional
frameworks for trade/investment integration and regional nancial management is
overriding. They have found the large benet of economic integration and its
institutionalization to outweigh the costs of not doing so. Needless to say, it is extremely
important to raise the economic basis of poor members within East Asia to encourage them
to grow. For the time being, a realistic approach would be a multi-track approach:
Countries that are ready for deeper integration and closer cooperation may pursue RTAs
and nancial arrangements, while those countries not ready are advised to strive for
structural, institutional and governance reformswith assistance from Japan, Korea,
advanced ASEAN members and multilateral development banksto enable them to
benet from further liberalization and integration. As these low-income countries catch
up with their more advanced peers, they can start participating in closer economic
regionalism.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 50
4.3. Trust building and leadership
On the issue of political consensus, it is important to point out that the regions
governments have initiated efforts to form an East Asian Community, whose most
important component is an East Asian Economic Community. Though a unied ASEAN
remains as an important key player in East Asia,
31
Japan and China, as the most important
drivers, must form both a solid bipolar alliance and joint leadership. For these purposes,
they need to resolve the issues impeding deeper economic integration between them and to
re-establish mutual trust.
32
Without a solid Sino-Japanese relationship, the region cannot
make meaningful progress on economic regionalism that may eventually lead to an East
Asian Economic Community.
It is important to realize that China is changing rapidly in its approach to regional
economic cooperation. The payoff of such a policy appears high for China because its
economic growth depends on the favorable prospect of the regional economies, political
stability, and peace and security. Its FTA initiative with ASEAN is one important sign of its
willingness to deepen its economic, as well as political, relationship with its Southeast Asian
neighbors. Its active engagement with the CMI and surveillance is another sign. China faces
two big challenges. First, a transition froma planned economy to a market must be achieved.
In particular, further liberalization of trade, investment and capital accounts is crucial for its
integration with the regional and global economies, which needs to be pursued in a cautious,
well-sequenced way. Second, the transition of its political system must be achieved in an
orderly way for the stability of not only China but also of East Asia and the World.
The absence of a solid, region-wide security arrangement with military functions may
make it difcult for the regions economies to deepen economic cooperation, including
initiatives for the creation of a region-wide FTA and formal nancial institutions, and
eventually an East Asian economic community. This absence may be partly attributed to
the difference in political systems, the lack of common culture, religion, value, shared
history, and mutual trust across East Asia. Many of these points are valid. However, a
convergence toward similar political systems will inevitably take place as China and other
communist countries continue to pursue market-based structural reforms and achieve
economic development and further integration with the global and regional economies,
because these will encourage them to move toward more democratic societies.
It is essential that Japan and China, the two economic powers in the region, work
together for closer economic regionalism. To some extent, healthy rivalry between the two
major powers is desirable as long as it enhances market-driven competition and does not
impede mutual trust and sense of community in East Asia. The two countries must jointly
work hard on the following key issues:
To resolve the history issue permanently so that the two countries can rebuild mutual
trust for greater economic integration.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 51
31
Ba (2003) argues that while important differences remain, the relationship between China and ASEAN has
improved markedly over the past decade. See also Wong and Chan (2003).
32
Rozman (2002) argues that China continues to see Japan as a partner and a rival, struggling to balance between
the two.
To cooperate to nurture emerging economic regionalism in East Asia particularly on
trade, investment, and nancial issues, including the formation of an East Asia-wide
FTA, a zone of stable Asian currencies, and eventually an East Asian Economic
Community.
To strengthen various types of bilateral economic policy dialogue including, for
example, investment rules, protection of intellectual property rights, macroeconomic
policy management, food and energy security, etc.
All of this is entirely possible if both sides take bold and forward-looking political gestures.
5. Concluding remarks
This paper has demonstrated that the East Asian economies have achieved strong
economic interdependence, particularly through external liberalization, domestic
structural reforms and market-driven integration with the global and regional economies.
Expansion of foreign trade, direct investment and nancial ows has created a naturally
integrated economic zone in East Asia. Reecting the rising economic interdependence
and in response to the traumatic nancial crisis of 19971998, East Asia has embarked on
various initiatives for economic regionalism. Such initiatives include the formation of
several bilateral FTAs, the beginning of negotiations for sub-regional FTAs, the
establishment of a regional surveillance mechanism, the introduction of a regional liquidity
support system (CMI) and Asian bond market development. These essentially entail the
formal institutionalization of de facto economic integration and interdependence in East
Asia in a way that complements global frameworks of the WTO and the IMF.
There are several challenges for the region. First, the regional economies should
accelerate negotiations on bilateral and sub-regional FTAssuch as JapanKorea
EPA, JapanASEAN EPA, ChinaASEAN FTA and KoreaASEAN FTAwhich
provide a critical basis for further integration and interdependence. Such regional trade
agreements need to avoid the counterproductive spaghetti bowl effect, by ensuring that
rules, standards and procedures are coherent across different FTAs in the region, and by
maintaining WTO consistencyand even by strengthening the WTO framework through
pursuit of an outward-oriented, WTO-plus approach. This process requires substantial
structural reforms on the part of all economies, including in both manufacturing and
agricultural sectors. This is particularly the case with ASEAN: Its middle-income member
states must reform their economies to cope with greater international competition,
particularly vis-a`-vis China, while its low-income members must pursue institutional and
governance reforms to enable them to benet from trade and FDI openness.
Second, the regional economies need to make further progress in the area of money and
nance, by strengthening the liquidity provision mechanism (CMI), the policy dialogue
and economic surveillance process, and Asian bond market development initiatives. It is
crucial to enhance the functioning of the CMI on the occasion of its review to be made in
May 2005 through: the substantial enlargement of its size; multilateralization and joint
activation of the currency swap arrangements; and reduction of its IMF linkage. For such
reforms, it is therefore essential to make the surveillance process effective, improve the
regional capacity to formulate appropriate adjustment policy in the event of liquidity crisis
M. Kawai / Journal of Asian Economics 16 (2005) 2955 52
and, to the extent necessary, enforce effective private sector involvement. Once these
efforts are made, East Asia will have effectively established an AMF that can contribute to
regional nancial stability without creating fears of moral hazard.
Third, it is time to initiate exchange rate policy coordination because there has not been
much progress in this area. The rst step would be for the regional economies to discuss
exchange rate issues as part of an enhanced surveillance process. The next task is to
introduce a G-3 currency basket arrangement based on the Japanese yen, the US dollar and
the euro among the emerging East Asian economies. The third task is to introduce a
regional common unit of account in East Asiaan Asian Currency Unit (ACU)whose
weights should reect the relative importance of the regional economies. It would be useful
for ASEAN + 3 to discuss member countries exchange rate deviations from the regional
average in reference to the ACU. Once the region (or a group of countries in the region)
becomes more integrated over time, exhibits greater economic and political convergence,
and hence is better prepared for a more permanent commitment to economic policy
coordination, more formal institutions capable of supporting intra-regional exchange rate
stabilitysuch as an Asian Snake or an Asian ERMneed to be built, perhaps on a
multi-track basis.
Finally, it is important to overcome various impediments to closer economic
regionalism. Some of the impediments will become less serious as economic
interdependence deepens in the region, while others require fundamental efforts such
as integrating ASEAN late-comers with the regional and global markets. The region must
nurture the sense of mutual trust and community by developing a long-term vision for the
political and economic future of East Asia and having such a vision shared by the general
public in the region. One vision for a future East Asian Economic Community would be a
full-edged economic and monetary union with a single currency like the euro zone. Japan
and China must assume joint leadership toward East Asian economic integration by
permanently resolving, and putting behind, the history issue.
References
Asian Development Bank (Ed.). (2004). Monetary and nancial integration in East Asia: The way ahead (Vols. 1
2). Houndmills, New York: Palqrave, MacMillan.
Athukorala, P.-c. (2003, October). Product fragmentation and trade patterns in East Asia (working paper no.
2003/21). Division of Economics, Research School of Pacic and Asian Studies, Australian National
University.
Ba, A. D. (2003, July/August). China and ASEAN: Renavigating relations for a 21st-century Asia. Asian Survey,
43(4), 622647.
Bayoumi, T., & Eichengreen, B. (1994). One money or many? Analyzing the prospects for monetary unication in
various parts of the world (Princeton Studies in International Finance, No. 76). International Finance Section,
Princeton University.
Bayoumi, T., Eichengreen, B., &Mauro, P. (2000, June). On regional monetary arrangements for ASEAN. Journal
of the Japanese and International Economies, 14, 121148.
Bird, G., & Rajan, R. S. (2002, February). The evolving Asian nancial architecture (Essays in International
Economics, No. 226). International Economics Section, Princeton University, Princeton.
Brown, D. K., Deardorff, A. V., & Stern, R. M. (2003, June). Multilateral, regional and bilateral trade-policy
options for the United States and Japan. World Economy, 26(6), 803828.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 53
East Asia Study Group. (2002, November 4). Final report of the East Asia Study Group. ASEAN + 3 Summit,
Phnom Penh, Cambodia.
East Asia Vision Group. (2001). Toward an East Asian community: Region of peace, prosperity and progress. East
Asia Vision Group Report.
Eichengreen, B. (1999, February). Toward a new international nancial architecture: A practical post-Asia
agenda. Washington, DC: Institute for International Economics.
Eichengreen, B. (2004a). Hanging together? On monetary and nancial cooperation. In Y. Shahid, M. Anjun Altaf,
& K. Nabeshima (Eds.), Global change and East Asian policy initiatives (pp. 2562). Washington, DC and
New York: World Bank and Oxford University Press.
Eichengreen, B. (2004b). The case for oating exchange rates in Asia. In Asian Development Bank (Ed.),
Monetary and nancial integration in East Asia: The way ahead (Vol. 2, pp. 4989). Houndmills and New
York: Palgrave MacMillan.
Eichengreen, B., & Bayoumi, T. (1999). Is Asia an optimum currency area? Can it become one? Regional, global
and historical perspectives on Asian monetary relations. In S. Collignon, J. Pisani-Ferry, & Y. C. Park (Eds.),
Exchange rate policies in emerging Asian countries (pp. 347366). London: Routledge.
Fukao, K., Ishido, H., & Ito, K. (2003, December). Vertical intra-industry trade and foreign direct investment in
East Asia. Journal of the Japanese and International Economies, 17(4), 468506.
Fukasaku, K., Kawai, M., Plummer, M. G., & Trzeciak-Duval, A. (2005). Overview: Miracle, crisis and beyond.
Chapter 1 of a Joint MOF/PRI-OECDResearch Project, The Impact and Coherence of OECDCountry Policies
on Asian Developing Economies.
Girardin, E. (2004). Information exchange, surveillance systems and regional institutions in East Asia. In Asian
Development Bank (Ed.), Monetary and nancial integration in East Asia: The way ahead (Vol. 1, pp. 5395).
Houndmills and New York: Palgrave MacMillan.
Goldstein, M. (2002, March). Managed oating plus (Policy Analyses in International Economics, No. 66).
Institute for International Economics, Washington, DC.
Goto, J., & Hamada, K. (1994). Economic preconditions for Asian regional integration. In & Macroeconomic
linkage: Savings, exchange rates, and capital ows (pp. 359385). Chicago: University of Chicago Press.
Hernandez, L., & Montiel, P. J. (2003, September). Post-crisis exchange rate policy in ve Asian countries: Filling
in the hollow middle? Journal of the Japanese and International Economies, 17(3), 336369.
Kawai, M. (1997). Japans trade and investment in East Asia. In D. Robertson (Ed.), East Asian trade after the
Uruguay round (pp. 209226). Cambridge: Cambridge University Press.
Kawai, M. (2002a). Global, regional and national approaches to the international nancial architecture:
Lessons from the East Asian crisis. International Economy (Japan Society of International Economics),
7, 65108.
Kawai, M. (2002b, December). Exchange rate arrangements in East Asia: Lessons from the 199798 currency
crisis. In Monetary and economic studies (special edition, Vol. 20, pp. 167204). Institute for Monetary and
Economic Studies, Bank of Japan.
Kawai, M. (2004a). The case for a tri-polar currency basket systemfor emerging East Asia. In G. de Brouwer &M.
Kawai (Eds.), Exchange rate regimes in East Asia (pp. 360384). London and New York: Routledge Curzon.
Kawai, M. (2004b, December). Trade and investment integration and cooperation in East Asia: Empirical
evidence and issues. Arevised version of a paper presented to the High-Level Conference on Asias Economic
Cooperation and Integration (July 12) organized by the Asian Development Bank, Manila.
Kawai, M., &Motonishi, T. (2004, December). Macroeconomic interdependence in East Asia: Empirical evidence
and issues. A revised version of a paper presented to the High-Level Conference on Asias Economic
Cooperation and Integration (July 12) organized by the Asian Development Bank, Manila.
Kawai, M., Newfarmer, R., & Schmukler, S. (2003, June). Crisis and contagion in East Asia: Nine lessons (Policy
Research Working Paper No. 2610). World Bank, Washington, DC. Eastern Economic Journal (forthcoming).
Kawai, M., & Takagi, S. (2005, March). Proposed strategy for a regional exchange rate arrangement in post-crisis
East Asia. Global Economic Review, 34(1), 2265.
Kawai, M., &Urata, S. (1998). Are trade and direct investment substitutes or complements? An empirical analysis
of Japanese manufacturing industries. In H. Lee, & D. W. Roland-Holst (Eds.), Economic development and
cooperation in the pacic basin: Trade, investment, and environmental issues (pp. 251293). Cambridge, UK:
Cambridge University Press.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 54
Kawai, M., & Urata, S. (2004). Trade and foreign direct investment in East Asia. In G. de Brouwer, & M. Kawai
(Eds.), Economic linkages and implications for exchange rate regimes in East Asia (pp. 15102). London and
New York: Routledge Curzon.
Kenen, P. B. (2001). The international nancial architecture: Whats new? Whats missing? Washington, DC:
Institute for International Economics.
Kuroda, H., & Kawai, M. (2002, October). Strengthening regional nancial cooperation in East Asia. Pacic
Economic Papers, 332.
Lloyd, P. (2002, September). New bilateralism in the Asia Pacic. World Economy, 25(9), 12791296.
McKinnon, R. I. (2000, February). The East Asian dollar standard: Life after death? Economic Notes, 29, 3182.
McKinnon, R. I. (2004). The East Asian exchange rate dilemma and the world dollar standard. In S. Chirathivat,
E.-M. Claassen, & J. Schroeder (Eds.), East Asias monetary future: Integration in the global economy (pp.
103128). Cheltenham and Northampton: Edward Elgar.
Montiel, P. J. (2004). An overviewof monetary and nancial integration in East Asia. In Asian Development Bank
(Ed.), Monetary and nancial integration in East Asia: The way ahead (Vol. 1, pp. 152). Houndmills and New
York: Palgrave MacMillan.
Ogawa, E., &Ito, T. (2002). On the desirability of a regional basket currency arrangement. Journal of the Japanese
and International Economies, 16, 317334.
Organisation for Economic Co-Operation and Development (OECD). (2003). Regionalism and multilateral
trading system. Secretary General, Paris.
Pangestu, M., & Gooptu, S. (2003). New regionalism: Options for East Asia. In K. Krumm, & H. Kharas (Eds.),
East Asia integrates: A trade policy agenda for shared growth (pp. 3957). Washington, DC: World Bank.
Rajan, R., & Siregar, R. (2004). Centralized reserve pooling for the ASEAN + 3 countries. In Asian Development
Bank (Ed.), Monetary and nancial integration in East Asia: The way ahead (Vol. 2, pp. 285329).
Houndmills and New York: Palgrave MacMillan.
Rapkin, D. P. (2001, August). The United States, Japan, and the power to block: The APECand AMF cases. Pacic
Review, 14(3), 373410.
Ravenhill, J. (2001). Asia Pacic economic cooperation: The construction of Pacic Rimregionalism. Cambridge:
Cambridge University Press.
Rozman, G. (2002). Chinas changing images of Japan, 19892001: The struggle to balance partnership and
rivalry. International Relations of the Asia-Pacic, 2(1), 95130.
Scollay, R., & Gilbert, J. (2001). New subregional trading arrangements in the Asia-Pacic. Washington, DC:
Institute for International Economics.
Scollay, R., & Gilbert, J. (2003, May). Impact of East Asian regional or subregional FTAs. Report for the
Australian Department of Foreign Affairs and Trade, Canberra.
Stubbs, R. (2002, May/June). ASEAN plus three: Emerging East Asian regionalism? Asian Survey, 42(3), 440
455.
Terada, T. (2003). Constructing an East Asian concept and growing regional identity: From EAEC to
ASEAN + 3. Pacic Review, 16(2), 251277.
Urata, S. (2001). Emergence of an FDI-trade nexus and economic growth in East Asia. In J. Stiglitz, & S. Yusuf
(Eds.), Rethinking the East Asian miracle (pp. 407459). New York: Oxford University Press.
Williamson, J. (1999). The case for a common basket peg for East Asian currencies. In S. Collignon, J. Pisani-
Ferry, & Y. C. Park (Eds.), Exchange rate policies in emerging Asian countries (pp. 327343). London and
New York: Routledge.
Williamson, J. 2000. Exchange rate regimes for emerging markets: Reviving the intermediate option (Policy
Analyses in International Economics, 60). Institute for International Economics, Washington, DC.
Williamson, J. (2001). The case for a basket, band and crawl (BBC) regime for East Asia. In D. Gruen, & J. Simon
(Eds.), Future directions for monetary policies in East Asia (pp. 96111). Sydney: Reserve Bank of Australia.
Wong, J., & Chan, S. (2003, May/June). ChinaASEAN free trade agreement: Shaping future economic relations.
Asian Survey, 43(3), 507526.
Wyplosz, C. (2004). Regional exchange rate arrangements: Lessons from Europe for East Asia. In Asian
Development Bank (Ed.), Monetary and nancial integration in East Asia: The way ahead (Vol. 2, pp. 241
284). Houndmills and New York: Palgrave MacMillan.
M. Kawai / Journal of Asian Economics 16 (2005) 2955 55
Why Bother With Inter-Regionalism?
Negotiations for a European Union-Mercosur
Agreement*
MAHRUKH DOCTOR
University of Hull
Abstract
The article examines why a decade of inter-regional negotiations failed to result in an
EU-MERCOSUR agreement, notwithstanding motivating factors at the international,
national and societal level. It focuses on inter-regional trade and investment ows
to underline the practical value of any agreement, but also considers strategic and
ideational issues.
Introduction
Inter-regionalism, simply dened as institutionalized closer relations between
two regional blocs, only emerged as a phenomenon in international political
economy in the mid-1990s and the European Unions (EU) negotiations to
sign anAssociationAgreement with the Common Market of the South (MER-
COSUR) was an excellent illustration of this phenomenon. EU-MERCOSUR
negotiations involved the participation of the four MERCOSUR states on the
one hand and the EU-15 (25 from May 2004) on the other.
1
If negotiations
* The author wishes to acknowledge research funding from the Economic and Social Research Council of
the United Kingdom. The research grant contributed to developing the analysis in this article (ESRC
Research Grant R000223594; Project Title: Business, the State and Economic Reform: the Automotive
Industry in Brazil). She would also like to thank the two referees for their valuable comments.
1
MERCOSUR members: Brazil, Argentina, Uruguay and Paraguay. EU members (15): Belgium, Neth-
erlands, Luxembourg, Germany, France, United Kingdom, Spain, Portugal, Greece, Austria, Sweden,
JCMS 2007 Volume 45. Number 2. pp. 281314
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148,
USA
lead to the signing of a trade agreement, it would become the biggest free
trade area in the world and the rst free trade agreement between two customs
unions. MERCOSUR already was the EUs main trade partner in Latin
America as well as the main destination of investment ows to the region.
Similarly, in the past decade, the EU was MERCOSURs main trade partner
and source of foreign direct investment (FDI). EU rms invested over $104
billion in the four countries of MERCOSUR in the 1990s. Bi-regional trade
stood at $54 billion in 2003. These economic interests were reinforced by
strong social and cultural links between the two regions. Notwithstanding
expressions of interest on both sides, events and decisions in 2004, some
directly related to the political and economic situation in participating
Member States, but others linked to the (lack of) progress in multilateral trade
negotiations, frustrated efforts to conclude negotiations as planned.
The main puzzle related to EU-MERCOSUR negotiations is why bother
with inter-regionalism if agreement was so elusive even when accompanied
by strong expressions of mutual interest? The why bother question has two
aspects: rst, why were the EU and MERCOSUR bothering to negotiate a
bi-regional agreement? For example, to what extent were trade and invest-
ment patterns a stimulus for and/or obstacle to signing an agreement? Second,
why bother with negotiations when they were so long drawn out
2
and unlikely
to achieve the desired goals on either side? Moreover, why bother to complete
negotiations that were launched in a very different political and economic
context and where interests and preferences as well as trade and investment
ows have altered signicantly? In other words, does inter-regionalism still
matter for the EU and/or MERCOSUR? The analysis examines edgling
attempts to theorize inter-regionalism, not only because they are relevant to
understanding the objectives of and challenges facing EU-MERCOSUR
inter-regionalism, but also as a contribution to the academic debate on the
issue.
The article analyses procedural and substantive aspects of the negotiations
before engaging in a more detailed consideration of bi-regional trade and
investment ows. It is organized into ve sections. Section I looks at the
Denmark, Italy, Ireland and Finland. EU new members (10): Czech Republic, Hungary, Slovenia, Poland,
Malta, Slovakia, Cyprus, Latvia, Lithuania and Estonia.
2
In comparison, the EU found it much easier to negotiate with single states; thus, it signed a FTA with
Mexico in 2002 after only two years of negotiations and a similar agreement with Chile also after
approximately two years. Undoubtedly important for the speedy conclusion of negotiations were the
limited ambitions of both Mexico and Chile with respect to market access for agricultural goods and the
sticky issue of EU agricultural protection. All the same, one cannot overlook the complexities of inter-
regional agreements, which are weighed down with the need to balance myriad interests of different states
and societal actors, the process made more intricate by the different levels of intra-regional integration
across regions.
282 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
process and issues involved in launching inter-regional negotiations. Section
II examines theoretical considerations as well as practical motivations for and
disincentives to signing an inter-regional agreement, including the interna-
tional context, political preferences and economic interests. Section III
focuses on the structure of EU-MERCOSUR trade. Section IV charts the
pattern of EU-MERCOSUR investment. It nally concludes.
I. Negotiating an Inter-Regional Agreement
The inter-regionalism phenomenon itself may be viewed as an extension of
the new or open regionalism strategies (Robson, 1993; Walter, 1995;
Bulmer-Thomas, 2000; Breslin et al., 2002) adopted by many state and non-
state actors in the post-Cold War globalization context. Beginning in the
mid-1980s, states adopted new regionalism as an extroverted and liberalizing
response to the challenge of globalization and increasing interdependence in
the world economy, but initially conned themselves to broadening and
deepening ties with other states and markets within a region. It was only in the
mid-1990s that states began to consider engaging with other regions as an
effective means of applying open regionalism strategies to a wider area so as
to manage economic and security challenges from beyond the region. States
saw it as a means to respond to the challenge of deeper integration into the
global economy, ameliorate the (negative) impacts of globalization and
co-operate in creating a more secure multilateral order. In this view, discussed
in more detail later, inter-regionalism is but another stratum in the emerging
multilayered system of global governance (Hnggi et al., 2005).
The EU and MERCOSUR signed the Inter-Regional Framework for
Co-operation Agreement (IFCA) in December 1995, although EU technical
assistance pre-dated the signing of the framework agreement. The EU had
been openly supportive of MERCOSUR integration ever since the latters
inception in 1991, emphasizing their shared political values and the impor-
tance of social cohesion for both regions. When MERCOSUR launched its
customs union (albeit incomplete) in 1995, the EU offered to negotiate a
bi-regional association agreement with the aim of becoming close compan-
ions in a strategic inter-regional partnership (EU Strategy Paper, 2002a).
Inter-regional relations subsequently developed in four stages: (i) political
bargaining for a negotiating mandate within the EU (199599); (ii) formal
launch of inter-regional negotiations (19992001); (iii) substantive bargain-
ing (200104); and (iv) ongoing efforts to conclude an agreement (2004).
Importantly, the IFCAalso offered technical assistance to reinforce MER-
COSURs internal programme for completing a common market by January
WHY BOTHER WITH INTER-REGIONALISM 283
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
2006 (this did not materialize due to numerous political and economic set-
backs as discussed later). It provided substance to EU claims of a distinctive
approach to its relations with less developed countries with priority placed on
globally projecting European values emphasizing democracy, human rights,
citizenship and regional integration based on equity and co-operation rather
than power inequalities (Grugel, 2004). Pea and Messerlin (2004, p. 14) also
noted that one of the most original aspects of a bi-regional association would
be its potential to enhance efforts to deepen the integration process amongst
developing countries and help them tackle some of their social problems. In
their view, the EUs extensive experience in facilitating the transition of
Central European and Mediterranean countries towards more stable democ-
racies and modern economies with social cohesion should help ensure the
same effect in MERCOSUR (Pea and Messerlin, 2004, p. 20).
Although the IFCA was signed in December 1995, the European Com-
mission only managed to put forward a proposal for a negotiating mandate in
July 1998.
3
Formal negotiations on the three elements of political dialogue,
co-operation and technical assistance, and trade issues, commenced only after
the First EU-MERCOSUR Bi-Regional Summit held in Rio de Janeiro in
June 1999. Yet it was only in July 2001 that the EU made its rst tariff offer,
which kick-started the process of substantive bargaining. With respect to trade
negotiations, the aim was to move towards free trade in goods and services in
conformity with World Trade Organization (WTO) rules. However, the EU,
reecting the protectionist preferences of the inter-governmental European
Council (its highest decision-making body), sought to delay substantive nego-
tiations for as long as possible and demanded the label preferential as
opposed to free trade negotiations. It also explicitly linked the talks to the
up-coming WTO Round (subsequently aborted at Seattle in 1999 and
re-started at Doha in 2001, but which then slumped at Cancun in 2003),
whose unsteady course was reected in the lack of progress on the inter-
regional front.
The EU-MERCOSUR Bi-regional Negotiations Committee (BNC) was
the main forum for negotiations and its work was complemented by other
institutional mechanisms such as the Sub Committee on Co-operation (SCC)
as well as the three Technical Groups on trade issues. The IFCA allowed
scope for regime building, including inter-regional agreements on a broad
range of issues such as competition policy, government procurement,
3
In 1998, EU-MERCOSUR trade attained record highs, with the EU exporting 24 billion to MERCO-
SUR and importing approximately 18 billion from MERCOSUR. It was only thereafter that a formal
negotiating mandate nally came through suggesting the importance of markets in regional integration
processes.
284 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
liberalization of trade in services and investment rules. It even opened the
opportunity for WTO-plus agreements in the areas of services, investment
and agriculture.
The BNC met three times every year to discuss progress in the negotia-
tions with a focus on trade issues. Table 1 indicates the 15 rounds of nego-
tiations to October 2004. Meanwhile, the SCC met regularly to deal with a
range of other issues including institutional support, customs harmonization,
technical norms and standards, statistical harmonization, veterinary and
phytosanitary rules and support for civil society organizations. In 2002, the
European Strategy Paper indicated the allocation of 48 million to MERCO-
SUR in support of these areas. The Memorandum of Understanding
(Commission, 2002b) identied European priorities emphasizing institution
building, integration of the MERCOSUR internal market and support for civil
society. Despite the regular meetings and concerted efforts to intensify nego-
tiations from November 2003 onwards, negotiators were unable to nalize an
EU-MERCOSUR Association Agreement in time for the Second EU-Latin
America Summit in Mexico in May 2004. Even more frustratingly for those
in favour of an agreement, the political window of opportunity appeared to
close rmly, when an agreement not only failed to be signed before EU
enlargement, but also missed the October 2004 deadline that coincided with
the end of term of the serving Commission.
Table 1: European Union-MERCOSUR Negotiations
Round Date Venue Key issues
1st April 2000 Buenos Aires Political dialogue, co-operation & trade
2nd June 2000 Brussels Identied obstacles and objectives
3rd November 2000 Brasilia Exchange of technical data
4th March 2001 Brussels Co-operation and non-tariff trade issues
5th July 2001 Montevideo EU rst tariff offer
6th October 2001 Brussels MERCOSUR rst tariff offer
7th April 2002 Buenos Aires Political & co-operation chapters; trade
facilitation measures package
8th November 2002 Brasilia Trade & investment rules (technical issues)
9th March 2003 Brussels Substantive tariff offers; govt. procurement &
investment
10th June 2003 Asuncion Govt. procurement, investment & services
11th December 2003 Brussels Agricultural modalities
12th February 2004 Buenos Aires Competition, customs & tariffs
13th May 2004 Brussels Exchange views on up-coming tariff offers
14th June 2004 Buenos Aires Attempt to nalize negotiations
15th July 2004 Brussels Attempt to nalize negotiations
Source: Commission (2004).
WHY BOTHER WITH INTER-REGIONALISM 285
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Since negotiating methodology was on the basis of single undertaking
(nothing is agreed until all is agreed), an eventual association agreement
required progress on all negotiating fronts. However, this was difcult to
achieve in practice good progress on the procedural front, in terms of
engagement in the process, was not matched by similar progress on substan-
tive issues. Substantive bargaining was partly hampered by procedural and
technical inconsistencies. For example, notwithstanding the long preparatory
phase preceding substantive bargaining, negotiators failed to resolve basic
technical issues such as dening the methods and modalities of tariff offers.
This resulted in mismatched offers that then needed to be untangled, which
further complicated negotiations (Rios and Doctor, 2004). Substantive out-
comes also suffered due to the inability to create an inter-regional consensus
on a number of politically and economically sensitive issues, a situation
made worse by the deteriorating national and international environment (dis-
cussed later). In order to realize the full potential of an inter-regional agree-
ment, Member States needed rst to resolve issues closer to home, such as
assimilating ten new (and poorer) members into the EU, adopting a more
pragmatic approach to MERCOSUR consolidation and overcoming mercan-
tilist attitudes on both sides. These issues became even more salient when the
EU and MERCOSUR found themselves on opposite sides at the WTO min-
isterial conferences at Cancun (2003) and Hong Kong (2005). The impasse
that developed at the multilateral level highlighted their differences and
negotiators on both sides were forced to push back the original negotiation
timetable on numerous occasions on the principle that no agreement is better
than a bad one. Differences remained even as negotiating deadlines passed
by in October 2004 for the EU-MERCOSUR talks and in December 2004
for the Doha Round but each side agreed to maintain ministerial-level talks.
However, these also failed to achieve results in the next two years.
II. Motivation for Obstacles to an Inter-Regional Agreement
This section rst outlines theoretical approaches to studying inter-regionalism
and then discusses why each side is engaged in the process as well as the
likelihood of negotiators successfully signing a meaningful EU-MERCOSUR
association agreement.
It is worth noting that the theoretical literature differentiates the concepts
of regionalization and regionalism as well as that of inter-regionalism.
Whereas regionalization is a trade-driven, often bottom-up process of inten-
sifying interaction led by non-state actors, regionalism is the conscious policy
of states, a top-down process, seeking greater regional co-operation on a
286 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
range of issues from security to the economy. Regionalism is often viewed as
a response to the essentially complementary processes of regionalization and
globalization (Hnggi et al., 2005; Gilson, 2002). Theories of regionalism,
including open or new regionalism, typically examine the process and
causal factors behind the emergence of regionalism or the character of
regional arrangements. Regionalism is often analysed in terms of social,
political, economic and organizational cohesiveness with special attention
given to regional inter-dependence (Hurrell, 1995). The new regionalism
that emerged in the mid-1980s did so in the context of structural transforma-
tion in the global economy (namely, globalization), dominance of neo-
liberalism in policy-making (namely, the Washington Consensus) and the
end of Cold War bi-polarity. It privileged an extroverted rather than intro-
verted response to the growing interdependence in the global political
economy. It sometimes challenged and at other times strengthened the nation-
state as well as non-state actors (Hettne and Sderbaum, 2002).
Inter-regionalism is an even newer phenomenon, which brings together
debates on how regionalization, regionalism and globalization are restructur-
ing the international system. Theorizing inter-regionalism is still in its infancy
and what little has been written on inter-regionalism and the relationship
between regionalism and inter-regionalism tends to be descriptive rather than
analytical or comparative.
Roloff (2005) provides a broad denition of inter-regionalism as a process
of deepening political, economic and societal interaction between interna-
tional regions (Roloff, 2005). It exhibits both top-down and outside-in
aspects, i.e. it is a state actor driven process where systemic (outside) pres-
sures reinforce regionalisms (inside) dynamics. Rland (2002a) is more
specic and denes inter-regionalism as:
group-to-group dialogue with more or less regular meetings centring on the
exchange of information and co-operation (projects) in specic policy elds
(trade and investment, environment, crime prevention). It is based on a low
level of institutionalization [. . .] no common overarching institutions, both
sides exclusively rely on their own institutional infrastructure.
Although studies in inter-regionalism have not produced any new theories
as such, Hnggi et al. (2005) point out that they have helped increase accep-
tance that international relations are not driven only by power nor exclusively
by co-operative motivations. Rather they are the result of a mix of neo-realist
concerns with power (both soft and hard) and more liberal concerns with
principles and the reality of complex interdependence (Keohane and Nye,
1977). Hnggi (2000) shows how the approach chosen depends on the focus
of the analysis. For example, one could focus on the dynamics of regional
WHY BOTHER WITH INTER-REGIONALISM 287
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
rivalries (realist) or co-operative efforts to manage complex interdependence
(liberal institutionalist) or identity formation through inter-regional interac-
tion (constructivist).
An interesting exploration of this mix is Grugels (2004) comparison of
United States (US) and EU strategies of inter-regionalism in Latin America.
The US preference for rules-based integration demonstrates its continued
emphasis on power. The US role as global hegemon elicits little interest in
institution-building, but sees it put greater focus on the balancing and agenda-
setting functions of regionalism (Rland, 2005). In contrast, the EUs pref-
erence for developing dense networks of social and political relationships to
complement its economic governance agenda emphasizes the concept of
partnership and the value of institution-building. Grugel (2004) discusses
how the EU prefers to highlight the transferability of European norms (e.g.
democracy, respect for human rights, welfare and economic equity) as a
means of increasing EU inuence, enhancing the EUs soft power and reaf-
rming its role as a global actor.
Others, like Roloff (1998, 2001), Gilson (2002), Faust (2002) as well as
the author in this article, prefer a multi-layered combination of approaches to
analyse inter-regionalism. For example, Roloff points to the usefulness of
combining neo-realist and political economy approaches, i.e. to seeing inter-
regionalism as a blend of the complementary logics of the balance of power
and complex interdependence (Roloff, 2005, p. 24). He (Roloff, 2005, p. 28)
postulates the thesis that symmetries in interdependence promote inter-
regional co-operation, because there is a perception among states that gains of
co-operation will be symmetrical. This is an important theoretical point,
especially given that structural asymmetries are one of the distinguishing
features of MERCOSUR (Motta Veiga, 2004) not to mention the obvious
asymmetry between regions in the North and South. The implications of this
lack of symmetry within MERCOSUR and in EU-MERCOSUR relations
will be discussed later.
Finally, one could view regionalism and inter-regionalism as a response to
the weakening political control of nation-states in the context of globalization
(Hurrell and Fawcett, 1995). Here, inter-regionalism is the deliberate
response of states to the external challenges of globalization and regionaliza-
tion, and therefore, a strategy employed to help balance the shift of power
from states to markets as well as to help states minimize the risks associated
with the uncertain conditions of economic globalization (Roloff, 2005;
Grugel, 2004). Then, inter-regionalism becomes but an extension or corol-
lary of the new regionalism (Hnggi, 2000).
Attempts at formalizing EU-MERCOSUR inter-regionalism provide rich
material to support the development of theories of inter-regionalism. The
288 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
following discussion will pick up on the above-mentioned theoretical
approaches and explore some of their insights to understand both motivations
for and obstacles to nalizing an EU-MERCOSUR agreement. This article
argues that to understand the process by which inter-regionalism emerges and
the characteristics and functions of any resulting inter-regional arrangement,
one must rst understand why (and to whom) inter-regionalism matters. Next,
one needs to weigh the importance of these reasons for political and societal
actors involved in the inter-regional process (e.g. if outside-in pressures were
crucial to launching negotiations, but insufcient to build local momentum,
inter-regional talks might peter out). Finally, one must analyse the extent to
which the nature of the process (e.g. top-down rather than society driven)
boosts or hinders substantive progress. To draw out these theoretical insights,
the analysis sets up a multi-causal framework to explain the process of
EU-MERCOSUR inter-regionalism. Next, it analyses the series of imbal-
ances (in power and preferences) that stall negotiations and hinder the devel-
opment of a deeper institutionalized inter-regionalism (these imbalances also
make it difcult to go beyond Rlands (2002a), above-cited denition).
Following Faust (2002), the multi-causal framework applied to the dis-
cussion incorporates three levels of analysis: the international, regional/
national and societal/sub-national. The remainder of this section focuses on
the key motivations at each of the three levels at the time negotiations were
launched and also examines whether conditions and interests subsequently
changed resulting in diminished interest in successfully completing negotia-
tions. According to evidence (discussed below), the key drivers of inter-
regionalism and the desire to sign an EU-MERCOSUR agreement were:
(i) the international context in the 1990s, which favoured collective
approaches to facing the challenges posed by globalization and the
end of Cold War bi-polarity;
(ii) the strategic preferences of political actors in both regions, which
favoured the deepening and widening of their regionalism projects;
and
(iii) the interests of economic and other societal actors, which favoured
institutionalization of inter-regional economic and political relations
to harness the gains and minimize the losses from integration and
reform.
International Context
The end of the Cold War allowed room for the emergence of a new region-
alism to face the challenges of development and integration into global
markets. Global-level variables such as multinational corporation (MNC)
WHY BOTHER WITH INTER-REGIONALISM 289
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
activities and their responses to the international division of labour and
production, inuence of the international nancial institutions and the WTO,
ideology, and other regional developments, all together affected the incentive
structure for regionalism and inter-regionalism (Breslin and Higgott, 2000). A
systemic or outside-in analysis, as previously discussed, emphasized how
globalization encouraged state and trans-national actors to build coalitions
exibly and pragmatically to address the challenges posed by the need to
redene concepts of sovereignty and re-evaluate processes of multi-layered
governance (Roloff, 2005).
Within this general context, each regional bloc had an additional set of
concerns and incentives to engage in an inter-regional dialogue. For the EU,
encouraging closer ties with MERCOSUR was connected to its concern about
expanding US activism in the region the Initiative of the Americas in 1990,
the North American Free Trade Area (NAFTA) in 1994, and nally, the
launch of negotiations for a Free Trade Area of the Americas (FTAA) in 1999.
Peaks in EU negotiating seriousness tended to coincide with peaks in per-
ceived US inuence in the region. Similarly, EU strategy was clearly and
explicitly tied to progress in WTO talks (Rios and Doctor, 2004). Periods of
stagnation in multilateral trade talks tended to coincide with increased efforts
as well as difculties in getting results at the inter-regional level. Finally, the
EU was eager to extend regional co-operation to the inter-regional level, with
the aim of using the latter as a positive framework within which to develop
international relations peacefully (Commission, 2002a).
International factors also inuence inter-regionalism negatively. From the
EUs perspective, the emerging markets nancial crises of 199798 suddenly
altered EU opinion of MERCOSUR, which dropped from being seen as a
dynamic region with abundant opportunities for European trade and invest-
ment to a much less attractive region (this view was subsequently reinforced
with the collapse of the Argentine economy in late 2001).
4
For MERCOSUR, there was also a clear advantage in advancing in par-
allel on all three negotiating fronts, i.e. WTO, FTAA and EU-MERCOSUR.
The Southern Cone countries, especially Brazil, were very conscious of the
strategic value of playing off the Europeans against the Americans to obtain
better results from bargaining in both arenas (Bulmer-Thomas, 2000). As
signs emerged that the EU was going to have to yield on the issue of
agriculture at the multilateral level, MERCOSUR negotiators became less
inclined to bargain in exchange for a reform that was anyway on the cards.
However, this situation meant that negotiations became so inter-linked that
stagnation in any one arena was replicated elsewhere.
4
Thanks to one of the anonymous referees for pointing out the importance of emphasizing this point.
290 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Nevertheless, abandoning talks was not on the cards, partly as a hedge
against the (increasingly likely) possible failure of the Doha Round. Thus,
although neither side seemed willing to move forward while chances of a
multilateral agreement remained alive, equally neither side wanted to
abandon denitively inter-regional talks in case they proved to be the only
alternative left on the table. This view is supported by the many examples of
countries in Latin America, who have given up on either WTO or FTAA
linked trade liberalization instead of focusing on bilateral free/preferential
trade agreements with the US.
Strategic Interests of Political Actors
The political agendas (regional and national levels) of EU and MERCOSUR
political actors suggested mixed motivations. First, interests and values inter-
mingled in the EU trade and investment interests concurred with develop-
ment and social cohesion preferences. State actors within the EU were eager
to export their institutional models to other parts of the world with a special
preference for supporting liberal democracy, market economies with liberal
economic governance structures and inter-regionalism as a framework for
international co-operation (Falkenberg, interview 2004; Faust, 2002). The EU
posture also had a strong development focus and its essential preference
(Falkenberg, interview 2004) was to develop a sustainable trade relation with
MERCOSUR to support the latter in consolidating its own regional market
and institutions. Securing greater access to MERCOSUR markets (regional
GDP was over $700 billion) and especially opening their markets for public
procurement was an obvious attraction of a bi-regional trade agreement, but
it also included a strategic interest in preserving market share in the event of
a FTAA. In the area of investment, the EU was keen to ensure clear and stable
rules that would reduce investment risks.
Finally, the broader power game within the institutional framework of the
EU between the supranational and more technocratic European Commission
and the inter-governmental and more politically inuenced Council shaped
actions and decisional outcomes in the inter-regional arena (Faust, 2002). For
example, the Commission initially sought to encourage trade liberalization
with MERCOSUR as a means of putting additional pressure on European
national governments to accept a reform of the Common Agricultural Policy
(CAP). However, conicting preferences within the EU, for example related
to environmental concerns and rural policy objectives, brought into stark
relief divergences in internal and external policy goals. Moreover, this stance
was further undercut when the Commission decided it made better sense to
make the big concessions in the multilateral arena (arguing that it had a
WHY BOTHER WITH INTER-REGIONALISM 291
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
single pocket), thus losing its enthusiasm for using MERCOSUR negotia-
tions as a test-bed and an intermediate step in opening the farm sector.
Regionalism was highly state-centric in MERCOSUR and national states
controlled policy choices and actions. Moreover, MERCOSUR negotiators
operated within purely inter-governmental structures, and there were no
supra-national bodies like the Commission to inuence preferences or out-
comes. Afactor of considerable importance was the strategic view Brazil took
of regional integration and inter-regionalism as a means of enhancing its
power and inuence in international fora as well as in the region (this factor
gained even more importance after 2003, when Luiz Incio Lula da Silva
became president of Brazil).
So, why were MERCOSUR state actors interested in inter-regional poli-
cies? Firstly, they embarked upon the regionalism project and inter-regional
negotiations as complements to market liberalization reforms adopted in
MERCOSUR economies (Devlin and Ffrench-Davis, 1999). However, as
reform fatigue set in and dealing with domestic economic crises overtook
other policy priorities, it became increasingly difcult to sustain interest in
overcoming national differences and to agree on the regional or inter-regional
level. It became evident that political actors in MERCOSUR saw inter-
regionalism as a means of mitigating the impact of market liberalization,
enhancing the potential benets of integration into global production net-
works, ameliorating intra-regional political tensions and supporting consoli-
dation of MERCOSUR itself. Moreover, policy preferences shifted as state
actors rethought their development models, policy principles and preferred
institutional congurations (Phillips, 2002, p. 66). Initially the shift favoured
inter-regionalism, but by 200405 a number of new developments made
MERCOSURs negotiating stance more inexible and less enthusiastic about
inter-regionalism with some elements of negotiation fatigue also evident.
For example, state actors clearly were wary of opening government procure-
ment to EU rms and their positions hardened against EU demands related to
services, competition and investment.
Second, although MERCOSURgovernments were eager to attract more EU
investment and to get greater access for their agricultural goods in EUmarkets,
they were careful to balance the benets on offer with the concessions they
were expected to make (a typical realist position). Third, in strategic terms,
they were also concerned with maintaining a balance in the geographical
distribution of trade and investment. Thus, in part, they used EU-MERCOSUR
negotiations to counter-balance US inuence in the region and enhance MER-
COSURs position in other regional and multilateral fora. Finally, MERCO-
SUR governments identied with the EU model (a constructivist as well as
liberal-institutionalist argument), which served as the inspiration behind their
292 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
own regional integration project. They regarded closer ties with and institu-
tional support from the EU as a crucial means of strengthening their own
regionalism and weathering their many intra-regional crises.
Although political expressions of interest were reiterated in the course of
the decade, those in favour of inter-regional liberalization saw negotiations
become increasingly complicated as new tensions appeared over time. For
example, the EUs deepening (monetary union) and widening (enlargement)
agendas as well as MERCOSURs deteriorating domestic economic situation,
which threatened the very survival of regionalism in the Southern Cone,
further complicated an already dense negotiating agenda. By early 2004,
there were some positive signs coming from MERCOSUR leaders in terms of
their commitment to consolidating the intra-regional market and institutions
as well as augmenting efforts for access to larger markets via extra-regional
agreements. Moreover, they recognized the constructive role the EU could
play in supporting their countries policies aimed at social cohesion and
justice. However, by 2005, signals were mixed. Initially there was a shift in
focus to intra-regional markets and creating a South American bloc, which
might even have acted as an impediment to signing an inter-regional agree-
ment.
5
Moreover, diversication of MERCOSUR export markets, especially
in the key area of agricultural commodities, lessened the pressure for ensuring
greater market access via an agreement. By 2006, changes in regional politi-
cal and economic conditions saw a further deterioration in conditions for
regionalism and inter-regionalism. President Vazquez of Uruguay empha-
sized Uruguayan interest in signing a bilateral agreement with the US, while
both Uruguay and Paraguay suggested that they might consider downgrading
their participation in MERCOSUR. Growing frustration due to the slow
progress in talks, changing evaluations of the benets of inter-regionalism,
and shifting perceptions of the balance of power within and between regions
together acted to diminish interest in quickly nalizing negotiations. Rather,
as liberal-institutionalist and neo-realist theories would predict, each side
calculated that it might make better sense to wait.
Economic Interests of Societal Actors
Whereas the previous discussion focused on outside-in or top-down
approaches to explaining inter-regionalism, this section considers a third set
of factors, which highlight the importance of inside-out or bottom-up
aspects in the desire to deepen EU-MERCOSUR relations. Given that all the
5
An indication of the difculties ahead is evident in the increasingly strident comments of President
Chavez of Venezuela regarding regionalism in South America and the inability of both regions to make any
substantive progress at the EU-Latin America Summit in May 2006.
WHY BOTHER WITH INTER-REGIONALISM 293
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
participating states were democracies, regional and national political actors
took care to lter in societal interests when making policy. Thus, electoral
cycles often enhanced the impact of societal interests, which in turn inu-
enced the leeway allowed to negotiators and consequently, procedural and
substantive outcomes. An analysis of economic interests whether class or
sector based, i.e. examined in terms of business and labour or as industry,
services and agriculture demonstrates the key role of economic interests,
rst in launching negotiations and later in obstructing progress towards insti-
tutionalizing bi-regional links.
Not surprisingly, among the many interests involved, regionally organized
businesses, including agri-business, were the most active societal actors
engaged in the political bargaining process, whether pushing for market
opening or seeking to maintain protectionist policies.
The economic motor is the combination of thousands, if not millions, of
interactions that progressively create the ties and set the bounds related to
the different activities [. . .] Businesses play a key role in this, establishing
connections, gaining market access and forging durable partnerships.
(Renato Flores Jr., 2004)
6
Business showed the most dynamic and mixed intra-group divergences of
interest. On the one hand, it had much to gain; on the other, it provided some
of the sharpest objections to the conclusion of negotiations, because it feared
that there were no compensatory mechanisms available to losers from
liberalization. The industrial and service sectors in the EU, cognisant of the
potential gains from better access to MERCOSUR markets, at least initially,
lobbied hard for an agreement that would open the latters markets and allow
the integration of their MERCOSUR operations into global production
chains.
7
In contrast, the MERCOSUR manufacturing and services sectors
were more hesitant about further market liberalization, but they accepted that
more FDI would contribute to upgrading the competitiveness of regional
exports. Faust (2002) contrasted the active participation of the manufacturing
and agriculture lobbies in Europe with the more reactive articulation of
interests among South American societal actors. However, the latters
6
Flores conducted a detailed analysis, at product level, to identify a set of opportunities available to
competitive products for both partners and to clarify the gains for businesses on both sides. He calculated
that the total cost of lost opportunities for all internationally competitive businesses in both regions would
be around $3 billion at least, with most gains in MERCOSUR associated with agricultural commodities
and the food sector while EU gains more evenly spread across a diversied export portfolio (2004).
7
For example, see the Union of Industrial and Employers Confederations of Europe (UNICE) open letters
(dated 12 October 2004) to EU Commission President Prodi and to Commissioner Lamy (access via:
http://www.mebf.co.br).
294 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
behaviour suggested weaknesses in the ability to organize collective action
rather than indifference to negotiating outcomes.
The evolution of the MERCOSUR-European Union Business Forum
(MEBF) was a good illustration of how difcult it was to maintain inter-
regional co-operation to push through a bi-regional agreement. In 1999,
business leaders established the MEBF with the aim of organizing the col-
lective action of pro-free trade businesses in both regions. MEBF member-
ship was on an individual rather than associational basis, and members
designated two co-presidents (one from each region) to emphasize its
bi-regional character. Although the MEBF was a key actor in the initial
stages of the negotiations, gradually particularist sector-specic positions
and deteriorating economic conditions undermined the coherence of the
forum. Thus, collective action problems and the difcult economic conjunc-
ture in MERCOSUR reduced the MEBFs efciency, initiative and inu-
ence.
8
Not surprisingly, policy-makers remained unconvinced about the
seriousness and consistency of business positions, which were often inter-
preted as mere rhetorical statements rather than genuine expressions of
interest in a bi-regional agreement.
It is difcult to overestimate the role of the agricultural sector in the
negotiations, and agricultural interests on both sides involved their govern-
ments and negotiators in a virtual tug-of-war. The article does not aim to
discuss EU farmers positions on reform of CAP or trade in agricultural goods
this has been extensively analysed elsewhere (Grant, 2003; Rieger, 2000;
Patterson, 1997; Daugbjerg, 2003; Daugbjerg and Swinbank, 2004; Jank et al.,
2004). Here it is sufcient to note that farm and agri-business interest groups
within the EU did everything to prevent the launch of inter-regional negotia-
tions. First, they argued that negotiations with MERCOSUR would overload
the multilateral trade and EU reform agendas, especially with respect to CAP
reform. When this tactic failed, EU agricultural interests, fearful of Brazilian
and Argentine competition, demanded (and got) a direct link between nego-
tiations with MEROSUR and the WTO. They also obstructed progress in
negotiations wherever possible.
9
They have successfully delayed the signing of
8
In 2005, various MEBF documents point to the importance of generating support and visibility for
MEBF activities among rms as well as enhancing contact and inuence with negotiators. Earlier docu-
ments put forward a much more optimistic picture of their role in the process (see for example, the minutes
of the joint steering committee meeting in November 2005 access via the web: www.mebf.org/en/news/
news21112005_2.html).
9
Press coverage of the issue is extensive, but one can also nd mention of this in special publications and
civic society organizations. For example, Eurochambers conducted a survey in JanuaryFebruary 2002 of
members views on EU-Latin American relations. The report repeatedly alluded to the need for the EU
farm lobby to adopt a more exible position on agricultural tariffs and market access (Eurochambers,
2002).
WHY BOTHER WITH INTER-REGIONALISM 295
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
any agreement that would give MERCOSUR freer access to the European
market. Meanwhile, MERCOSURagricultural interests demanded that the EU
guarantee market access for their products. The specic issues discussed
ranged from the removal of quotas to the harmonization of health, veterinary
and phytosanitary standards (see Jank et al., 2004, for an extensive discussion
of the main knots in the agriculture negotiations). Interestingly, over time and
given booming demand for MERCOSUR agricultural products in China, the
agri-business lobby has become less insistent on an immediate resolution to
their problems in accessing EU markets.
Finally, a brief comment on labour unions and civil society organizations:
given genuine concerns related to growing unemployment on both sides,
labour unions generally articulated protectionist positions on a bi-regional
agreement, although they tended to use informal bargaining channels rather
than any institutionalized forum to represent their views and interests. There
is no formal separate consideration of the movement of workers (footballers
being a case in point) between the two regions, although this is dealt with in
other fora. Other civil society organizations on both sides similarly monitored
progress in the negotiations with an eye to protecting their own privileges and
interests, although there was some interest in deepening inter-regional cul-
tural and social links (as outlined in the Regional Strategy Paper, Commis-
sion, 2002a). Moreover, their views cannot be ignored, since at some future
date, citizens and civil society actors will underwrite the ultimate political and
social legitimacy of any association agreement (Gratius, 2004).
To summarize, although political actors at regional and national levels
on both sides demonstrated ideational preferences, rhetorical support and
optimism towards concluding a bi-regional agreement, more concrete
obstacles, such as conicting interests and practical concerns about avail-
able compensation for losers, prevented the signing of an agreement (see
Vallado and Guerrieri, 2004, for a discussion of non-trade issues related to
implementing an agreement). Similarly, the above analysis also pointed to
the minimal importance of security aspects in EU-MERCOSUR inter-
regionalism, while highlighting the central importance of economic issues,
whether as stimulant or obstacle. Economic interests (as manifested in
manufacturing and farm lobbies) had a denite impact on the negotiating
process, and also inuenced the range of possibilities for substantive out-
comes in an eventual agreement.
The remainder of the article examines two central pillars of inter-regional
economic relations trade and investment to better understand the eco-
nomic interests at stake. The next section examines the pattern and evolution
of trade ows and how the structure of inter-regional trade generated
imbalances, which in the absence of compensatory schemes made further
296 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
trade liberalization difcult. The following section considers similar issues
and problems in the area of investment.
III. Inter-Regional Trade
According to then EU Trade Commissioner Pascal Lamy,
10
EU trade policy
was not an end in itself, but rather served as a means of improving the quality
of life of its citizens and other individuals, promoting EU values and sustain-
able development beyond Europe and balancing market access with better
rules to steer the globalization process. Thus, global governance and eco-
nomic institution-building were signicant facets of the inter-regionalism
project from an EU perspective. Notwithstanding all the rhetoric around the
explicit objective of deepening political, economic, social and cultural links
between the two regions, economic ows both trade and nance/investment
lay at the heart of the inability to conclude negotiations. Once one stripped
away the distractions offered by the many named or explicit objectives, it
was patent that the substantive core of any agreement would be measured by
the potential economic impacts of a bi-regional association as well as public
perceptions thereof. Three imbalances emerged to hinder progress in signing
an inter-regional trade and investment agreement. These imbalances lay in
conicts arising from differences in (i) state and societal interests in each
region; (ii) the distribution of producer gains and losses; and (iii) the relative
importance of each region for the others trade ows. Moreover, there was the
additional complicating factor that the two key economic variables (trade and
investment ows) do not pull in the same direction within each bloc,
although the presence of complementary interests across regions somewhat
ameliorated this situation. Thus, the Europeans feared liberalizing agricul-
tural trade, but demanded greater liberalization of capital ows and in pro-
cedures for government procurement as well as freer trade in industrialized
products. Meanwhile, the South Americans demanded greater access to the
EU market and reduced EU intervention in the agricultural sector, but were
reluctant to forsake their control over public procurement contracts and indus-
trial policy instruments, whether to benet trade or investment. In addition, a
number of trade and investment related issues were also being discussed at the
multilateral level, which inuenced (often even restricted) bargaining posi-
tions in the inter-regional arena. Finally, the dynamics of EU and MERCO-
SUR trade ows have altered (in some cases beyond recognition when
compared to the mid-1990s); thus, shifting preferences have muddied the
10
Pascal Lamy, Is the EU an Economic Superpower? Talk at St. Antonys College, Oxford, 10 March
2004.
WHY BOTHER WITH INTER-REGIONALISM 297
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
negotiators task. The above imbalances lay at the heart of why both sides
seemed less and less eager to bother with signing an agreement.
By late 1999, when negotiations began, the EU was MERCOSURs
leading customer, supplier and source of FDI. Similarly, MERCOSUR was
the EUs main customer, supplier and destination of FDI in Latin America
(see Tables 2 and 3). In the 1990s, inter-regional trade grew twice as fast as
growth rates in global trade, with EU exports to MERCOSUR on average
increasing 25 per cent annually, and MERCOSUR exports to the EU on
average growing 4 per cent annually (Rios and Doctor, 2004). During the
course of that decade, MERCOSUR was the most dynamic emerging market
for EU exports (see Table 4), registering a cumulative increase of 350 per cent
in the decade (IRELA, 2000). Although exports to the EU did not display
similar dynamism (see Table 5), they still remained the most important
market in absolute terms and also presented the greatest growth potential,
Table 2: EU Trade with MERCOSUR to 2001 (in million ECU/Euros)
1990
a
1995
a
1998
a
2000 2001
Exports 5,479 16,589 24,083 24,215 24,628
Imports 13,783 14,868 17,836 24,567 25,772
Trade Balance -8,304 1,721 6,247 -352 -1,144
Source: Eurostat (2006a).
Note:
a
Excluding Paraguay.
Table 3: EU Trade with MERCOSUR post-Argentine Collapse (in million
ECU/Euros)
2001 2002 2003 2004 2005
Exports 24,628 18,529 15,585 18,367 20,632
Imports 25,772 25,149 25,992 28,361 30,467
Trade Balance -1,144 -6,620 -10,407 -9,993 -9,835
Source: Eurostat (2006a).
Table 4: EU Exports to MERCOSUR by Country (in million ECU/Euros)
1990 1998 2001 2003 2005
Brazil 3,925 15,651 18,545 12,373 15,969
Argentina 1,307 7,645 5,074 2,676 4,041
Uruguay 247 907 758 392 452
Paraguay na na 251 140 170
Source: Eurostat (2002, 2006a).
298 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
especially for MEROSUR agricultural producers. Finally, although the
average Common External Tariff (CET) in both regions was relatively low
(9.4 per cent in the EU and 12.5 per cent in MERCOSUR), both protected key
products in their inter-regional trade. For example, EU tariffs on strategic
agricultural goods on MERCOSURs export list were over 85 per cent (some-
times as high as 277 per cent) and major EU manufactured exports faced
higher than average tariffs in MERCOSUR (e.g. 35 per cent for cars). In
addition, both regions encountered a series of non-tariff barriers (NTBs) in
each others markets (discussed below).
The structure of inter-regional trade followed a typical NorthSouth
pattern, i.e. about 51 per cent of EU imports from MERCOSUR were agri-
cultural goods and over 95 per cent of EU exports to MERCOSUR were
industrialized goods (see Tables 6 and 7). Moreover, the proportion and value
of MERCOSUR agricultural goods exports would probably be signicantly
higher if the EU liberalized its market and reduced its domestic support to the
sector. Again, typical of the NorthSouth pattern, the key issue in non-
agricultural goods trade tended to focus on liberalization demands of EU
business and continued protectionist preferences in MERCOSUR. These
manifested themselves in high tariffs, but also NTBs related to rules of origin,
standards, duty drawback schemes, anti-dumping and safeguard mechanisms.
Table 5: EU Imports from MERCOSUR by Country (in million ECU/Euros)
1990 1998 2001 2003 2005
Brazil 9,636 13,226 19,267 18,781 23,225
Argentina 3,559 4,166 5,738 6,311 6,367
Uruguay 588 444 505 610 606
Paraguay na na 262 290 269
Source: Eurostat (2002, 2006a).
Table 6: Product Breakdown of EU Exports to MERCOSUR in 2005 (in million
euros)
Product/SITC Category MERCOSUR Brazil Argentina
Food, Beverages & Tobacco (SITC 0 + 1) 472 360 53
Raw Materials (SITC 2 + 4) 314 254 46
Energy (SITC 3) 299 227 71
Chemical Products (SITC 5) 4,300 3,289 844
Machinery & Transport Equipment (SITC 7) 10,700 8,471 2,018
Miscellaneous Manufactured Goods (SITC 6 + 8) 3,908 2,896 865
Source: Eurostat (2006a).
WHY BOTHER WITH INTER-REGIONALISM 299
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Thus, differences arose due to issues related to market access as well as trade
and investment regimes. Problems were due to inconsistent interpretations of
trade rules and application of NTBs, but also because of the lack of denition
over technical issues related to the presentation of offers. Despite the apparent
intransigent nature of the debate a virtual dialogue of the deaf at times
negotiators claimed to believe that there was room for mutual gains.
In the period under consideration, the EU was (and remains) the worlds
largest trade bloc and most successful regional integration scheme. Intra-
regional trade accounted for over 60 per cent of EU states trade, while
extra-regional trade exceeded the value of any other country or regional
blocs trade. Although EU trade with MERCOSUR grew quickly in the 1990s
as a result of unilateral liberalization in the Member States of the latter and
MERCOSUR represented a little over half of EUs total trade with Latin
America, the absolute and relative size of inter-regional trade remained
small.
11
Only 2.8 per cent of all extra-EU exports went to MERCOSUR and
only 2.4 per cent of total extra-EU imports originated in MERCOSUR. EU
businesses and governments were keen to expand export markets and
throughout the 1990s the EU maintained its trade surplus with MERCOSUR.
Not surprisingly, inter-regional policies were seen as a key means of guaran-
teeing even better market access. EU exports to MERCOSUR mainly con-
sisted of vehicles and capital goods, but also chemicals and some high value
added consumer goods. EU agricultural exports to MERCOSUR were limited
(only 1.7 per cent of the EUs total agricultural exports) and tended to be
concentrated in high value products such as wines and spirits, cheese and
11
Interestingly, although the value of Brazilian exports to the EU increased over this period, Brazils
ranking as trade partner actually dropped from being the EUs seventh largest source of imports in 1990
to its thirteenth largest in 2001. This could be explained by growing competitiveness and easier access of
countries in East Asia and Eastern/Central Europe (such as South Korea, Taiwan, Poland, Hungary, Czech
Republic and Turkey).
Table 7: Product Breakdown of EU Imports from MERCOSUR in 2005 (in million
euros)
Product/SITC category MERCOSUR Brazil Argentina
Food, Beverages & Tobacco (SITC 0 + 1) 11,090 6,549 4,248
Raw Materials (SITC 2 + 4) 8,300 6,951 919
Energy (SITC 3) 753 720 34
Chemical Products (SITC 5) 1,261 1,029 220
Machinery & Transport Equipment (SITC 7) 3,768 3,466 298
Miscellaneous Manufactured Goods (SITC 6 + 8) 4,885 4,200 564
Source: Eurostat (2006a).
300 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
olive oil. The main items on the EUs export list reected the interests of
powerful manufacturing industries and service sector rms.
12
For example,
EU exporters of nancial and telecommunications services were especially
interested in MERCOSUR liberalizing intra-regional service trade, in the rst
instance, so that they might benet from economies of scale, greater trans-
parency and other efciency gains related to regional integration.
Throughout negotiations under IFCA, MERCOSUR was the third largest
trade bloc after the EU and NAFTA, but it was an imperfect customs union
(for example, it had not implemented a CET for important sectors such as
computer equipment, telecommunications and capital goods). Nor was there
a completely free ow of goods within the region creating additional inef-
ciencies in MERCOSURs external trade relations. The most important
exception to free trade was the automotive industry and Argentine policy
announcements in 2004 conrmed that managed trade in the sector was
unlikely to be done away with before 2010. MERCOSUR plans to end all
exceptions to the free intra-zonal movement of goods and services and the
CET for extra-zonal goods and services by January 2006 were optimistic,
given the economic and political setbacks of the past few years, as discussed
in the concluding section. Although the EUs share of MERCOSUR exports
fell from 32 per cent in 1990 to 23 per cent in 1997, the EU remained the main
extra-regional market.
MERCOSUR exports to the EU were also more heavily concentrated in
agricultural goods than in its trade with the US. In 2002, MERCOSUR
agricultural exports totalled $29 billion, of which the EU imported $10.4
billion or 35 per cent (Jank et al., 2004). Meanwhile, some 16 per cent of EU
agricultural exports originated in MERCOSUR (Commission, 2004) and
there was much scope for expansion. Although many items faced low tariffs
and entered the EU relatively easily (the EU offer covered approximately 90
per cent of agricultural trade), a critical number of the most sensitive goods,
where MERCOSUR directly competed with protected EU producers, held up
overall progress in the negotiations. The key products affected by EU pro-
tectionism were cereals, sugar and tobacco products, meat and meat products,
dairy and poultry. Here, the region faced high tariffs (over 600 tariff lines have
tariffs over 30 per cent), in addition to quotas, extra-quota tariffs and a range
of NTBs. Alongside the many trade barriers, MERCOSUR exports faced
further disadvantages compared to some of the EUs other trade partners,
such as the ACP countries Europes former colonies in Africa, the Carib-
bean and Pacic (Bulmer-Thomas, 2000).
12
Service sector presence is a relatively new phenomenon, a result of strong EU investments in MERCO-
SUR during the privatization process of the 1990s.
WHY BOTHER WITH INTER-REGIONALISM 301
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Finally, it is worth reiterating that during the 1990s, the balance of trade
consistently favoured the EU, although in a context of rising exports from
MERCOSUR. More recently, domestic economic crises
13
in MERCOSUR
reversed that trend, although a concentrated export drive, especially in Brazil,
also contributed to the MERCOSUR trade surplus with the EU.
14
So, how
would a free trade agreement affect trade ows and balances? Simulations
showed that EU imports from MERCOSUR would rise by little as a result of
tariff elimination (61 per cent of goods already enter duty free), but EU
exports to MERCOSUR would rise more signicantly (Bulmer-Thomas,
2000). Others showed how given that MERCOSUR exports were subject
to a signicant number of tariff peaks, full liberalization would lead to
more concentrated gains in specic MERCOSUR sectors (Flores, Jr., 2004).
Overall, an inter-regional trade agreement was likely to benet EU producers
more than MERCOSUR producers, and consumers in both regions would be
better off from freer bi-regional trade (beneting from improvements in price,
quality, choice and so on). However, some EU producers would sustain heavy
losses due to the competitiveness of MERCOSUR agricultural exports. Thus,
for the EU, the crux of the matter was that MERCOSUR was most competi-
tive in the very sector where EU political actors faced the heaviest pressures
to protect producers. Confronted with clashing societal interests, where losers
were organized in a more concentrated and assertive manner than the winners
from free trade, EU negotiators found it difcult to yield to MERCOSUR
demands.
The situation was slightly different in MERCOSUR, where state actors did
not face really active or strong lobbies opposing an inter-regional agreement.
However, given that MERCOSUR businesses expected rather meagre overall
gains, it was not surprising that inter-regionalism initially was driven forward
by state actors, more focused on political stabilization and a macro-economic
logic than on specic sectoral gains and losses. Business interest in trade with
EU countries picked up in the past couple of years with MERCOSUR exports
to the EU growing around 9 per cent annually. However, from MERCOSURs
statist viewpoint, wider strategic priorities remained of greater consequence
and trade aspects of an accord only served the secondary purpose of reward-
ing certain economic sectors so as to make an agreement more politically
saleable. This also implied that for MERCOSUR the procedural aspects of
13
For example, Argentine imports from the EU dropped 18.4 per cent year-on-year in 2001, followed by
another 57.3 per cent drop from 2001 to 2002. Uruguay experienced similarly sharp drops in its imports,
and in 2003, the value of its imports from the EU were at 40 per cent of their 2000 level.
14
Between 2003 and 2005, MERCOSUR posted over 9.8 billion annual surpluses with the EU. However,
European exports to MERCOSUR recovered quickly with 17.8 per cent growth in 2004 and another 12.3
per cent in 2005.
302 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
being involved in negotiating an inter-regional agreement served a useful
purpose in and of itself. That is, substantive outcomes in terms of trade
creation were less important and certainly not immediately necessary.
To summarize, the analysis demonstrated how the conicts arising from
the above-mentioned three imbalances largely explained the stagnation in
EU-MERCOSUR trade negotiations and the reduced urgency for signing an
agreement. Hence, although the EU was the bigger winner, it was also in the
situation where it faced strongest opposition from sections of society that it
was unwilling to challenge, because its potential partner (MERCOSUR) was
relatively insignicant in its overall trade ows. The implications of these
imbalances are explored in the concluding section of the article.
IV. Inter-Regional Investment
This section argues that inter-regional investment relations encountered a
parallel set of imbalances, which informed progress (or lack thereof) in
negotiations to determine the rules that would govern inter-regional invest-
ments. Here again, there were differences that arose from state and societal
interests, producer gains and losses and unequal bargaining power. This
section explores the nature of these imbalances and how they impacted the
scope for institution-building in inter-regional investment relations.
The 1990s saw unprecedented ows of FDI around the globe and a record
$1.4 trillion in 2000 (Amann and Voduek, 2004). Alongside China, Latin
America was among the greatest beneciaries of the global investment ows
triggered by the capital abundance of that decade. Within Latin America,
MERCOSUR was the favoured destination, especially among European
rms. Net EU FDI outows to MERCOSUR rose from annual averages of
about $2 billion in the 199095 period to annual averages of over $28 billion
in the 19982000 period. The region received approximately two-thirds of
total FDI to Latin America (Bulmer-Thomas, 2000; Commission, 2002c).
Between 1990 and 1999, EU rms invested about $104.45 billion in MER-
COSUR. The typical investment strategy remained market-seeking (now
focused on the regional rather than the national). Efciency-seeking invest-
ments oriented towards integrating MERCOSUR into global production and
distribution networks only gradually found expression in corporate plans for
the region (Mortimore, 2000). While there was no marked transformation in
investment strategy, there were two signicant changes away from earlier
investment patterns: rst, in terms of sector, and second, in terms of country
of origin of these investments. Whereas in the past, EU rms typically
invested in the manufacturing sector, during the 1990s approximately 80 per
WHY BOTHER WITH INTER-REGIONALISM 303
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
cent of the investment inow into MERCOSUR was geared to the service
sector (mainly due to the privatization of public utilities and liberalization in
the nancial and down-stream oil sectors).
15
Moreover, FDI originated in a
more diverse set of countries, with the Spanish, Portuguese, Italians and
Dutch playing a much greater role than before.
The main factors underlying EU rms decisions to invest in the region
were: (i) market-friendly policy reform; (ii) global decline in barriers to
trade and investment; and (iii) generally buoyant international capital
markets (Amann and Voduek, 2004). In the rst half of the 1990s, MER-
COSUR economies beneted from an economic resurgence in the aftermath
of successful stabilization programmes and market liberalization. Macro-
economic stabilization, selective deregulation, privatization, fewer restric-
tions on foreign ownership and other market-friendly policy reforms
improved the investment climate. Meanwhile, the trend towards market lib-
eralization embraced in MERCOSUR economies increased their exposure
to international competition and put greater pressure on already present
multinational rms to restructure, modernize and eventually integrate their
operations into global production chains. Interestingly, the regional integra-
tion programme itself was a response to the pressures of market liberaliza-
tion and globalization (Devlin and Ffrench Davis, 1999). Finally, the above
pull factors were reinforced by the push factor of a sustained upturn in
global capital markets, which saw equity values soar, while market liquidity
and ease of access to capital rose (Amann and Voduek, 2004). Thus, by the
mid-1990s, MERCOSUR economies, in the context of their reforms and
stabilization, were poised to take advantage of the positive mood towards
emerging markets.
Given the positive investment climate at the start of EU-MERCOSUR
inter-regional negotiations, the investment aspect of an agreement promised
to be less contentious at least in terms of the desire to see more inter-regional
ows. MERCOSUR saw it as another means of locking in economic reforms
as well as an opportunity to encourage European investors to use MERCO-
SUR as a gateway to enter other Latin American markets (see Table 8). The
EU saw it as a promising region for market growth and encouraged its rms
to invest in the region to avoid losing market share to US rms in case of a
FTAA. Moreover, since the EU had already signed an extensive range of
agreements with other countries, there was a great administrative incentive
within the Commission to foster a common set of investment and trade rules
across its many accords. EU rms tried to establish and institutionalize
15
In contrast, in Asia, only 34 per cent of EU FDI went to the service sector and 62 per cent to
manufacturing.
304 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
globally agreed standards for trade and investment rules, such as those related
to rules of origin, because this facilitated corporate planning and the integra-
tion of global operations. Each side also expected an association agreement to
serve as a signalling device, basically to reassure business, but also to
promote good corporate governance, and perhaps even set precedents for
subsequent consideration at the WTO level.
However, this positive scenario dissipated quickly. FDI to Latin America
halved in a two-year period from $84 billion in 2001 to $42 billion in 2003
(Amann and Voduek, 2004). EU outward ows dropped even more sharply
and in 2003 were only a sixth of FDI in 2001 (see Table 9). The sharp drop
in net FDI ows to MERCOSUR cannot be blamed on external factors alone,
although undoubtedly the tightening liquidity in international capital markets
post-Asian crisis and decline in global equity values contributed to the down-
turn. The end of the so-called dot-com boom, corporate mismanagement
and nancial scandals in the EU and US rms (Parmalat, Italy and Enron,
USA to name just two) as well as the impact of the 11 September terrorist
attacks in 2001 all reversed the propitious investment mood of the 1990s.
Moreover, the widening of the EU shifted investment locational preferences
towards Central and Eastern Europe. Political and economic factors in MER-
COSUR also contributed to lower levels of interest. The change in investment
climate was partly due to an end to investment opportunities as privatization
processes wound down, but economic crises (e.g. Argentine devaluation and
Table 8: EU FDI Stock in Latin America, 2001
a
(Outward stock, end-year, in
millions of euros)
Latin America Brazil Argentina Mexico
EU 194,738 74,508 50,397 25,945
Percentage 100% 38% 26% 13%
Sources: Eurostat (2002); Amann and Voduek (2004).
Note:
a
Record year.
Table 9: EU FDI Outward Flows (in million ECU/euros)
1995 1998 2000 2001 2002 2003 2004
Brazil 730 18,107 23,642 10,050 -1,367 2,182 2,819
Argentina 635 3,358 5,936 5,612 1,159 -1,503 -1,773
Uruguay 31 201 1,229 450 106 175
Mexico 1,117 1,449 6,730 4,825 6,608 1,962 9,165
Latin America 3,566 26,253 46,188 29,644 11,244 5,077 13,381
Source: Eurostat (2006b).
WHY BOTHER WITH INTER-REGIONALISM 305
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
subsequent economic collapse in 2001), potential for political instability (e.g.
Brazilian elections in 2002) and uncertain property rights (e.g. the spillover
from developments in Bolivia and Venezuela in 2006) exacerbated the down-
ward trend.
In addition to these conjunctural factors, some longer-term structural
factors also impeded a sustained ow of FDI to MERCOSUR. These
included:
(i) extremely low systemic competitiveness (especially poor infrastruc-
ture, weak trade facilitation capabilities and under-investment in edu-
cation, science and technology);
(ii) inadequate regulatory regimes;
(iii) low levels of transparency and high levels of corruption; and
(iv) unstable domestic markets and unequal distribution of income that
inhibited consumption growth.
MERCOSUR negotiators were aware of the inadequacies of the regional
investment environment, and recognized the value of an inter-regional agree-
ment in supporting necessary reforms. They knew that enhancing the sys-
temic competitiveness of their economies was central to attracting more
desirable efciency-seeking investments from EU rms. They understood the
importance to investors of better infrastructure, more investment in education,
science and technology
16
and a fully-edged smoothly operating customs
union. Moreover, MERCOSUR governments, especially Brazil, shifted their
preferences with respect to the quality of investment they sought to attract.
They believed that prioritizing systemic competitiveness issues would facili-
tate export-oriented activities and help set up MERCOSUR as an export
platform for regional and extra-regional markets. This was a critical factor in
the face of growing competition from Eastern Europe and East Asia. Finally,
macroeconomic and income distribution-related issues seriously hampered
rm protability and increased investment risks, but limits of space do not
allow a more thorough examination of these issues.
As Brazilian Ambassador Alfredo Graa Lima put it, trade and invest-
ment accords go hand-in-hand in a globalized world.
17
Although both sides
preferred to go beyond a simple bare-bones trade accord, and were eager
to agree on the relevant investment issues that would strengthen the com-
petitiveness of their rms in the other regions market, neither side was in
a rush to nalize an investment accord. In Europe, negotiators came under
16
The last is particularly important given that MERCOSUR cannot compete on wage costs due to the high
pay-role taxes/contributions in the region (especially Brazil).
17
Working Group on EU-MERCOSUR Negotiations, Sciences Po, Paris, Barcelona Workshop, March
2004.
306 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
less pressure from bodies such as the MEBF, as rms investment priorities
shifted to the new members of the EU, and stagnation in FTAA talks
reduced the threat of US rms potentially gaining market share and inu-
ence in the region. The EU focused on getting the best deal possible in the
services and investment negotiations to compensate for the probable neces-
sity of yielding greater market access for agricultural goods, which was a
minimum expectation of the MERCOSUR negotiating team. In the South-
ern Cone, the negotiating stance also became rmer, despite the large con-
traction in investment ows. This position in some way reected the
growing disenchantment with neo-liberal policy prescriptions of market
opening and minimal state intervention in industrial policy. The various
economic crises across all four MERCOSUR countries also highlighted the
continued rivalry between Member States within the region. Nobody was
amenable to constraining the future use of initiatives in industrial and devel-
opment policy to encourage local businesses or investment in specic
sectors.
Within the already tense bargaining context, state actors knew that they
would be called upon to reconcile the interests of national and foreign pro-
ducers operating within their economies. They could not afford to alienate
either, since each had an important role to play within society, whether to
contribute towards enhancing growth and development, absorbing and
spreading technology, up-grading human capital or strengthening democratic
participation. Hence, it was not surprising that they were unwilling to be
bound by international agreements that reduced the exibility of their
national and regional investment and regulatory regimes (Pena and Sauv,
2004). Nor was it surprising, from a theoretical perspective at least, that the
unbalanced nature of investment ows and obvious unequal power positions
of the two negotiating parties, made agreement difcult. Yet, both had some-
thing to offer, and therefore, both bargained long and hard.
Conclusion
The initial political window of opportunity to nalize an association agree-
ment slipped by in October 2004, with the evolution of a series of unfavour-
able scenarios for closing a deal: the accession of ten new members to the
EU, the assumption of ofce of a new and expanded European Commis-
sion, stagnation in the Doha Round and at the FTAA negotiations, and
shifting priorities on both sides. However, they were insufcient to deni-
tively seal the fate of EU-MERCOSUR inter-regionalism. Thus, even
though Ambassador Graa Limas favourable expectations that common
WHY BOTHER WITH INTER-REGIONALISM 307
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
sense will prevail
18
failed to materialize, there were enough grounds to
agree to meet in April 2005 with the aim of nalizing negotiations. Sub-
sequent foot-dragging raised doubts in some quarters about whether it was
worth the effort to push through an inter-regional agreement, although by
the end of 2006 still no denitive decision was reached by policy-makers in
the two regions. Clearly, inconclusive talks were not enough to deter nego-
tiators from persevering, suggesting that talks in and of themselves were of
some value and that both parties were taking a long-term view to develop-
ing a strategic partnership (Grugel, 2004). This optimistic reading could be
placed alongside more sobering comments among negotiators referring to
negotiation fatigue and shifting political economy incentives that did not
favour an early conclusion to talks.
EU-MERCOSUR negotiators faced the uncomfortable combination of a
strong political will to institutionalize economic ties, but also rm counter-
active mercantilist attitudes in bargaining over the substantive aspects of an
agreement. To explain the puzzle raised by negotiators paradoxical inabil-
ity to come to an agreement, looking to theory suggests an explanation for
the hesitation and provides insight for its practical implications. As men-
tioned earlier, Roloff (2005) argues that inter-regional co-operation is very
much a function of symmetries in inter-dependence. The discussion on
trade and investment demonstrated that in EU-MERCOSUR relations inter-
dependencies are not symmetrical and hence a good predictor of difculties
in formalizing co-operation and institution-building. His thesis underlines
the argument that the article makes why bother with formalizing inter-
regionalism so long as the gains from doing so are viewed in neo-realist
zero-sum terms? Evidently, the weaker side/loser on any particular issue
found it hard to focus on the liberal promise of a positive sum outcome
with gains for all. The crux of the matter lay in whether the motivating
factors and political capital put into the negotiations outweighed the losses
both economic and reputational from not signing an agreement. Would
it matter if no agreement was signed? Who cared about the outcome of the
negotiations? Was anybody willing to go that extra mile to convince the
foot-draggers?
Again, there were three levels of analysis international, regional/national
and sub-national/societal to explain obstacles to an agreement as discussed
earlier. To summarize, among the main difculties were those related to
deadlock in the WTO and FTAA (international), divergent stance on key
issues such as agriculture (EU defensive position), services and government
procurement (MERCOSUR defensive position) and internal dynamics of
18
Barcelona Workshop, March 2004.
308 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
each region (EU enlargement and MERCOSUR difculties in consolidating
the customs union). Finally, societal actors remained divided on a number of
issues in the face of little reassurance that losers would be compensated. The
analysis examined some of the unease that developed around issues related to
economic governance, especially in the areas of trade and investment. Here,
concern centred on (i) unco-ordinated methods and modalities for presenting
offers; (ii) uneven emphasis on the importance of trade rules; (iii) inconsistent
interpretation of issues related to reciprocity, special and differential treat-
ment, tariff timetables, agricultural quotas implementation and management;
(iv) the desire to retain control over industrial policy instruments with impli-
cations for infant industry protection, rules of origin, government procure-
ment and regulatory regimes for service sector investments; and (v) the
incomplete nature of MERCOSUR integration which hindered free circula-
tion of goods and services within the region.
However, the dogged persistence of negotiators provided evidence that EU
interests were not limited to trade and investment, rather it had developed a
conscious political leg to its new regionalism (Grugel, 2004, p. 616). It was
part of the EU ethos that globalization cannot stop at economic liberalization,
but rather required states to address political, institutional and social issues as
part of a package that promoted a more humane model of global governance
(Grugel, 2004). Development, in this approach, was not fostered simply via
Washington Consensus style economic liberalization, but also encompassed
the activism of civil society and the commitment of states to democratic
participation and accountability as well as an environmentally sustainable
development. However, it is hard to ignore that the EUs current strategy
related to its insertion into the global economy is focused on issues and
challenges, where MERCOSUR poses no real threat.
19
The analysis in the conclusion is intentionally speculative and normative,
since the way forward is by no means clear. State actors will have to work
hard to negotiate acceptable trade-offs and reconcile clashing intra-regional
societal interests (for example, agriculture versus manufacturing in the EU).
Moreover, they will have to respond to emerging inter-regional conicts (for
example, divergent views of state and social actors over issues related to
development policy instruments in the hands of the state and investment
strategy decisions in the hands of rms). All the same, the article argues that
negotiators cannot afford to lose sight of the most signicant potential eco-
nomic outcomes of signing a bi-regional agreement. These include: (i)
increased access for MERCOSUR products in the EU market and EU goods
19
See EU policy documents and statements such as the Lisbon Strategy for Growth and Jobs and Global
Europe: Competing in the World, where Latin America does not feature as a threat.
WHY BOTHER WITH INTER-REGIONALISM 309
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
and services in MERCOSUR markets; (ii) clearer and predictable rules facili-
tating EU investment in MERCOSUR; (iii) better incentives to integrate
MERCOSUR products into global production chains; and (iv) greater
impetus for MERCOSUR to consolidate its regional integration (Rios and
Doctor, 2004). When one adds the political and institutional benets from
such an association and these are a crucial aspect of EU-MERCOSUR
inter-regionalism it becomes clear why both sides are bothering to pursue an
association agreement.
Interestingly, although, on the one hand, the EU was expected to gain more
in concrete terms as a result of trade and investment liberalization, the
inter-regional project as such was expected to change very little in the EU. On
the other hand, while MERCOSUR was expected to gain relatively less
(especially in terms of more exports), the inter-regionalism project could
work wonders for the consolidation of MERCOSUR and the economic
reforms undertaken in the region. It would also benet along the lines of
Lamys ideal, where economic governance contributed to enhancing citizens
quality of life. Thus, the cumulative impact of such an agreement could
actually transform the growth and development of the region. Finally, it is
also worth pointing out that should multilateral talks fail, inter-regionalism,
by default, might become the only viable option for expanding trade and
securing investment.
To conclude, the article focused on answering the questions set out at the
beginning. It examined the various motivations behind state and societal
interest in an inter-regionalism agreement. It also demonstrated how trade and
investment ows served to reinforce interest in an association agreement, but
on occasion also served to block progress in negotiations. The structure and
pattern of inter-regional trade and investment provided clues to the main
points of obstruction in the negotiations. On the principle that it was much
easier to solve problems once they were identied, the analysis also provided
insight into the way forward. In the case of trade and investment liberalization
agreements, this often meant that policy-makers must devise compensatory
mechanisms to overcome the resistance of vested interests and to help mini-
mize the social costs and negative welfare impact on particular groups as a
result of liberalization and regional integration. Finally, it argued that the
driving force behind inter-regionalism relied on satisfying interests, prefer-
ences and values in a context with reasonable symmetries in inter-
dependence. Where this was not immediately present, the why bother
question can only be answered by taking a long-term strategic view. Perhaps
this is the best explanation for the long-drawn out negotiations notwithstand-
ing strong expressions of mutual commitment to an inter-regional association
agreement.
310 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Correspondence:
Mahrukh Doctor
Lecturer in Political Economy
Department of Politics and International Studies
The University of Hull
Hull HU6 7RX, UK
Tel +44 01482 465 967 Fax +44 01482 466 208
email: m.doctor@hull.ac.uk
References
Amann, E. and Voduek, Z. (2004) Overview. In Voduek, Z. (ed.) FDI in Latin
America: the Role of European Investors. An Update. SOE/IDB Working Paper
Series No. 5 (Paris).
Breslin, S. and Higgott, R. (2000) Studying Regions: Learning from the Old,
Constructing the New. New Political Economy, Vol. 5, No. 3, pp. 33352.
Breslin, S., Hughes, C.W., Phillips, N. and Rosamond, B. (eds) (2002) New Region-
alisms in the Global Political Economy: Theories and Cases (London: Routledge).
Bulmer-Thomas, V. (2000) The European Union and MERCOSUR: Prospects for a
free trade agreement. Journal of Inter-American Studies and World Affairs, Vol.
42, No. 1, pp. 122.
Bulmer-Thomas, V. (ed.) (2001) Regional Integration in Latin America and the
Caribbean: the Political Economy of Open Regionalism (London: ILAS).
Commission of the European Communities (2002) External and Intra-European
Union Trade: Statistical Yearbook (19582001) (Luxembourg: European
Commission).
Commission of the European Communities (2002a) Mercosur-European Community
Regional Strategy Paper, 20022006 (Brussels: External Relations Directorate
General).
Commission of the European Communities (2002b) Memorandum of Understanding.
Commission of the European Communities (2002c) Una Asociacion para el futuro.
Montevideo (May).
Commission of the European Communities (2004) Bilateral Trade Relations.
Commission of the European Communities (2006a) EU Direct Investment Datasets,
available at: http://epp.eurostat.ec.europa.eu/.
Daugbjerg, C. (2003) Policy Feedback and Paradigm Shift in EU Agricultural
Policy: the Effects of the MacSharry Reform on Future Reform. Journal of
European Public Policy, Vol. 10, No. 3, pp. 42137.
Daugbjerg, C. and Swinbank, A. (2004) The CAP and EU Enlargement: Prospects
for an Alternative Strategy to Avoid the Lock-In of CAP Support. Journal of
Common Market Studies, Vol. 42, No. 1, pp. 99119.
Devlin, R. and Ffrench Davis, R. (1999) Towards an Evaluation of Regional
Integration in Latin America in the 1990s. The World Economy, Vol. 22, No. 2,
pp. 26190.
WHY BOTHER WITH INTER-REGIONALISM 311
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
ECLAC/CEPAL (2004) La Inversin Extranjera en Amrica Latina y el Caribe,
2003. Santiago.
Eurochambers (2002) Survey on European Union and Latin America Relations
(Brussels: Eurochambers External Affairs and Trade Department).
Eurostat (2002) External and Intra-European Union Trade: Statistical Yearbook
(19582001) (Luxembourg: European Commission).
Eurostat (2006a) External and Intra-European Union Trade: Monthly Statistics
(Luxembourg: European Commission).
Eurostat (2006b) EU Direct Investment Datasets (http://epp.eurostat.ec.
europa.eu).
Faust, J. (2002) The European Unionss Trade Policy Towards MERCOSUR.
Working Paper PEIF-7, Mainz, November.
Fawcett, L. and Hurrell, A. (eds) (1995) Regionalism in World Politics: Regional
Organization and International Order (Oxford: Oxford University Press).
Flores, Jr., R. (2004) Main Results of the Study. In Vallado, A. (ed.) The
EU-Mercosur Association Agreement: Mutual Advantages for Business and the
Cost of Failure (Paris: Chaire Mercosur de Sciences Po).
Gilson, J. (2002) Asia Meets Europe: Inter-Regionalism and the Asia-Europe
Meeting (Cheltenham: Edward Elgar).
Grant, W. (2003) The Prospects for CAP Reform. The Political Quarterly, Vol. 74,
No. 1, pp. 1926.
Gratius, S. (2004) The Civil Society Knot: How to Enhance the Societal Legiti-
macy of the EU-Mercosur Agreement. In Vallado, A. and Guerrieri, P. (eds)
Implementing a EU-Mercosur Agreement: Non-Trade Issues (Paris: Chaire
Mercosur de Sciences Po).
Grugel, J. (2004) New Regionalism and Modes of Governance Comparing US and
EU Strategies in Latin America. European Journal of International Relations,
Vol. 10, No. 4.
Hnggi, H. (2000) Interregionalism: Empirical and Theoretical Perspectives. Paper
for workshop on Dollars, Democracy and Trade: External Inuence on Economic
Integration in the Americas, Los Angeles: the Pacic Council on International
Policy (May).
Hnggi, H., Roloff, R. and Rland, J. (eds) (2005) Inter-Regionalism and Interna-
tional Relations (London: Routledge).
Hettne, B. and Sderbaum, F. (2002) Theorising the Rise of Regionness. In Breslin,
S. et al. (eds) New Regionalisms in the Global Political Economy: Theories and
Cases (London: Routledge).
Hurrell, A. (1995) Explaining the Resurgence of Regionalism in World Politics.
Review of International Studies, Vol. 24, No. 4.
IRELA (2000) La Union Europa y el Grupo de Rio: la Agenda Birregional (Madrid).
Jank, M.S., Carfantan, J., Kutas, G., Meirelles Netto, A.J., Nassar, A.M. and Cunha
Filho, J.H. (2004) Scenarios for Untying the Agriculture Knot. In Vallado, Pea
and Messerlin (eds) Concluding the EU-Mercosur Agreement: Feasible Scenarios
(Paris: Chaire Mercosur de Sciences Po).
312 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Keohane, R.O. and Nye, J.S. (1977) Power and Interdependence: World Politics in
Transition. Boston: Little, Brown and Co.).
Lamy, P. (2004) Is the EU an Economic Superpower? Talk at St Anthonys College,
Oxford, 10 March.
Mortimore, M. (2000) Corporate Strategies for FDI in the Context of Latin
Americas New Economic Model. World Development, Vol. 28, No. 9, pp.
161126.
Motta Veiga, P. (2004) Mercosur: Coping with the Structural Transition Costs
Associated with an Agreement with the EU. In Vallado, P. and Guerrieri, P. (eds)
Implementing a EU-Mercosur Agreement: Non-Trade Issues (Paris: Chaire Mer-
cosur de Sciences Po).
Patterson, L.A. (1997) Agricultural Policy Reform in the European Community:
a Three-Level Game Analysis. International Organization, Vol. 51, No. 2,
pp. 13565.
Pena, C. and Sauv, P. (2004) Untying the Knots in Services. In Vallado, P. and
Messerlin, P. (eds) Concluding the EU-Mercosur Agreement: Feasible Scenarios
(Paris: Chaire Mercosur de Sciences Po).
Pea, F. and Messerlin, P. (2004) Introduction. In Vallado, P. and Messerlin, P.
(eds) Concluding the EU-Mercosur Agreement: Feasible Scenarios (Paris: Chaire
Mercosur de Sciences Po).
Phillips, N. (2002) Governance after Financial Crisis: South American Perspectives
on the Reformulation of Regionalism. In Breslin et al. (eds) New Regionalisms in
the Global Political Economy: Theories and Cases (London: Routledge).
Rieger, E. (2000) The Common Agricultural Policy. In Wallace, W. and Wallace, H.
(eds) Policymaking in the European Union (Oxford: OUP).
Rios, S. and Doctor, M. (2004) Scenarios for Untying the Knots in Market Access
for Goods. In Vallado, P. and Messerlin, P. (eds) Concluding the EU-Mercosur
Agreement: Feasible Scenarios (Paris: Chaire Mercosur de Sciences Po).
Robson, P. (1993) The New Regionalism and Developing Countries. Journal of
Common Market Studies, Vol. 31, No. 3.
Roloff, R. (1998) Globalisierung, Regionalisierung und Gleichgewicht. In
Masala, C. and Roloff, R. (eds) Herausforderungen der Realpolitik (Kln: SH
Verlag).
Roloff, R. (2001) Europa, Amerika und Asien zwischen Globalisierung und Region-
alisierung (Paderborn: Shningh).
Roloff, R. (2005) Inter-Regionalism in Theoretical Perspective: State of the Art. In
Hnggi, H., Roloff, R. and Rland, J. (eds) Inter-regionalism and International
Relations (London: Routledge).
Rland, J. (2002a) Inter- and Trans-regionalism: Remarks on the State of the Art of
a New Research Agenda. National Europe Centre Paper No. 35, Workshop on
Asia-Pacic Studies in Australia and Europe: a research agenda for the future,
Australian National University (July).
Rland, J. (2002b) Inter-regionalism in International Relations. Workshop at
University of Freiburg, 31 January to 1 February.
WHY BOTHER WITH INTER-REGIONALISM 313
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd
Rland, J. (2005) Interregionalism: An Unnished Agenda. In Hnggi, H., Roloff,
R. and Rland, J. (eds) Inter-regionalism and International Relations (London:
Routledge).
UNICE (2004) Open Letter to EU Commission President Prodi and Commissioner
Lamy, 12 October (http://www.mebf.co.br).
Vallado, A. and Guerrieri, P. (eds) (2004) Implementing a EU-Mercosur Agreement:
Non-Trade Issues (Paris: Chaire Mercosur de Sciences Po).
Walter, A.W. (1995) Regionalism, Globalization and the World Economic Order.
In Fawcett, L. and Hurrell, A. (eds) Regionalism in World Politics: Regional
Organization and International Order (Oxford: Oxford University Press).
Author Interviews
Falkenberg, K.F. Deputy Director General of External Trade, EU Commis-
sion. Interview, 16 March 2004.
314 MAHRUKH DOCTOR
2007 The Author(s)
Journal compilation 2007 Blackwell Publishing Ltd