East Asia:Who Will Heed This World Bank Advice on Trade?
International Herald Tribune
August 9, 1994
Philip Bowring  

When is a trade bloc not a trade bloc? The answer seems to be: when it's a geographical expression and not a set of initials.

Semantics cannot disguise the fact that the World Bank's recent proposal that East Asian countries in unison reduce their trade barriers on a most-favored-nation basis twice as fast as the Uruguay Round requires amounts to a plea for a trade "grouping" if not a "bloc."

The World Bank's proposal is put forward in a suitably dull- sounding publication entitled "East Asia's Trade and Investment: Regional and Global Gains from Liberalization."

But at a time when there is almost feverish competition to build blocs of different shapes and sizes out of East Asian and Pacific countries, from Punta Arenas to Pyongyang and from Prince Edward Island to Phuket, the bank's innocuous-seeming academic exercise contains political dynamite.

It represents the most powerful economic case yet put forward for the East Asian Economic Group (EAEG) vigorously espoused by Malaysian Prime Minister Mahathir bin Mohamad.

The Malaysian proposal, which so irritated the United States, was subsequently toned down to the vaguer-sounding East Asian Economic Caucus, to accommodate neighbors. They did not want to reject Mr. Mahathir out of hand and preferred to pretend that the EAEC was, after all, compatible both with the wider APEC (Asia- Pacific Economic Cooperation) group, which now is being pushed by the United States, and with the narrower AFTA (ASEAN Free Trade Area).

The bank's report shows an obvious lack of enthusiasm for AFTA, which aims to eliminate tariffs among its current six members over the next 15 years. While AFTA, as a small preferential group, might bring in some new investment and eliminate some inefficient industries, its effects would at best be "modest" and might divert rather than create trade.

On the other hand, a "large" free trade area would be "difficult to negotiate." This might be taken as a reference to current ambitions for APEC. Whether it is or not, the very lack of discussion in the paper of APEC as a viable option is instructive - because over at APEC an Eminent Persons Group, led by C. Fred Bergsten of the Institute for International Economics in Washington, has been struggling to devise an architectural form to encompass both NAFTA plus Chile and the East Asians and Australasians.

The group has come up with a proposal for APEC to set a timetable for complete free trade among all its members by 2020, with the more advanced members getting there earlier.

It has made a valiant effort to square various circles without appearing to be a protective bloc or to impede wider trade liberalization. APEC would not be a preferential system, and members would offer unilateral reductions to each other and reciprocal ones to non-APEC members. Conceivably, APEC, whose members represent roughly half of world trade, could enhance that trade.

The idea will make a splash and help the images of Presidents Suharto and Bill Clinton, but there is widespread skepticism over its practicality. It is suspect in some Asian countries as an attempt to shore up North American influence, enabling the North Americans to enjoy the (preferential) benefits of the North American Free Trade Agreement without suffering any backlash in Asia.

The World Bank makes a strong case that welfare gains for East Asia from trade liberalization would be huge. At the same time, the East Asians would benefit the world by cutting their trade surpluses with Europe and North America, thereby reducing frictions and the likelihood of those regions raising barriers to protect employment.

Concerted East Asian liberalization would be by far the best of four options for the region studied by the World Bank. The next was region-wide preferential liberalization, followed by unilateral MFN liberalization, with small-group (that is, ASEAN) preferential liberalization at the bottom.

As the most dynamic economic region, East Asia has most to gain from liberalization, and most of that gain would be in intra-regional trade. The bank makes the telling point that for all the talk of interdependence, trade in the region accounts for only 41 percent of the East Asian total compared with 67 percent in 1938 - supposedly an era dominated by colonial trading patterns.

The bank's figures illustrate the limits of the mercantilist policies long followed in Northeast Asia and the losses that will arise if Southeast Asia endeavors to follow the same path.

For all its logic, however, the World Bank's arguments face many obstacles. One is the political motivation behind AFTA. Another is the lack of intellectual commitment by several East Asian countries (not least China) to the merits of free trade, however much it may in fact benefit. Yet another is the nationalistic or security-driven desire of many up-and-coming Asian countries to own their own industries, even at a high cost of efficiency.

Last, and first, is the question: How does East Asia act in concert if it has no framework for doing so?

Japan is sympathetic; it did nothing to discourage Mr. Mahathir's EAEG. But, having seen the virulence of U.S. reaction to that, Japan is unlikely to take up the cause of this Son of EAEG, despite its being clothed in World Bank jargon instead of Mahathirian invective. Its time may come, but not yet.

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