Regional Trading Agreements - Essay Example

East Asian countries have witnessed rapid regional economic integration in the past decades. Examine the rationale for various types of regional trading agreements (RTAs) in the region and evaluate the economic impacts of these RTAs on East Asian countries. Contents Contents 1 Introduction 2 Regional Trading Agreements 3 Regional economic integration 4 Rationale for various types of regional trading agreements (RTAs) in East Asian countries 5 Evaluation of the economic impacts of RTAs on East Asian countries 8 Advantages 8 Limitations 9 Conclusion 10 References 12 Introduction The regional trade agreements are the terms of the contract between the member countries of a particular region that that facilitates the growth of trade and commerce in the region. The rationale behind the adoption of regional trade agreements has been due to the need of revival of the economy from the position of financial crisis in the region. The motives behind the adoption of regional trade agreements have been also to revive the stagnancy in the economies. An example to the motive behind the adoption of regional trade agreements could be seen during the Asian financial crisis in the year of 1997. This has led to the rise in the regional trade agreements in the economy of East Asia over the past decades. Looking at the advantages and limitations of free trade in the region, the member countries in the region of East Asia have undertaken changes in their policies for entering into regional trade agreements. The regional trade agreements have allowed the economies to stimulate the growth of investment and demand in their economies. The mutual co-operation between the member countries in encouraging free trade is expected to attract the investors to take advantage of the economic incentives in the form of taxes and tariffs as agreed under the agreement of free trade. The regional trade agreement that have grown largely in the past decades in East Asia undermine the relevance of the empirical theories of hub and spoke arrangement in international trade. The regional trade agreements have led to the regional economic co-operation between the economies in the regional. There are various levels of economic cooperation that have been observed in the East Asian economy. The regional economic cooperation between the member countries have increased the economic status of the region and have helped them to assert their position in the international platform. Regional Trading Agreements The regional trade agreements have become a common tool for the multilateral trading between the countries of a particular region since 1990. The regional trading agreement play an important role in integrating the trade system of the countries engaged in multilateral trade. The regional trading agreements are the agreements and treaties in terms of tariffs, taxes as well as guarantees for investments that serve the purpose of reducing the restrictions of trade between the countries and foster the growth and development of trade between the countries (Drake-Brockman and Drysdale, 2002, p.10). The World Trade Organization prohibits discrimination of trade practices between the countries in order to provide all the countries with the equal opportunities of trade with no differences in the tax and tariff rates. Although the regional trade agreements serve the purpose of boosting the trade and commerce between neighbouring countries, these trade agreement are viewed to be against the principle of the WTO that is applicable for all the countries. There are around 489 regional trade agreements that have been executed as of 2011. The regional trade agreements have influenced the aspect of free trade and preferential trade between the countries that has led to the integration of regional economies. The regional trade agreements may be bilateral in which case two countries have entered into agreements of trade in order to remove the trade barriers and foster the growth of commercial transactions. In case of more than two countries engaged in the trade agreement, it could be termed as multilateral trade agreements (Drysdale, 2005, p.17). Regional economic integration The regional trade agreements between the countries in a particular geographic region have led to the free flow of goods and services between the countries due to the reduction of the trade barriers, tariffs and taxes under the agreement. The factors of production like the labour, capital, enterprises are also exchanged between the countries engaged in multilateral trade under the regional trade agreements. Thus the entire economy of the region is integrated as a result of the trade agreements between the countries. The various level of integration in the regional economies as a result of the regional trade agreements starts with the free trade followed by the union of the customs, common market, economic union and political union. The free trade integrate the regional economies with the free flow of investments and increase in regional trade. In order to facilitate the trade between the countries, the customs union plays a significant role in establishing a common trade policy and removes the national trade barriers. Due to the regional trade agreement between the countries, a common integrate market is established where the factors of production are exchanged due to the removal of trade barriers. The economic integration between the countries leads to a situation where a common tax rate is implemented, a common currency is put into effect for free convertibility of currency and easy transfer of capital between the economies (Wilfred, 1998, p.1152). In order to optimize the effects of regional trade agreements, the political union take place with the formation of a central political body that formulates the economic policies and the foreign policies of the participating members. The regional trade agreements and the subsequent regional economic integration between the countries provide the scope to take advantage of the factors of production that are available on exchange of trade. The regional economic integration leads to political stability in the region as the countries are bound to each other with mutual interest in multilateral trade and thus reduces the scope of conflict. Rationale for various types of regional trading agreements (RTAs) in East Asian countries The East Asian region has undergone regional economic integration in a large scale due to the increasing regional trade agreements between the member countries over the past decades. The rationale behind the various types of regional trade agreements in East Asian countries have been due to the need of economic cooperation in a multilateral fashion due to the adverse impacts of the financial crisis that occurred in east Asia in 1997. The policies of adopting regional trade agreements have been adopted by the member countries of East Asia due to the need of stimulating the economic demands and stimulating the growth of their economies in that reached a stage of stagnation due to the East Asian financial crisis. Also the East Asian economies realized that the exchange of trade on a multilateral basis between the member countries needs to be implemented in order to assert their economic position in the international platform (Carolyn, 2000, p.1324). Since the time of the financial crisis in East Asia and the subsequent effects of the fluctuation of the internal economy on the East Asian region, the East Asian member countries like China, Japan, Korea and others have resorted to the policy of setting up multilateral trade facilitated by regional free trade agreements. In case of China, the country has been aggressive in setting up regional free trade with the member countries that has been helped with its accession to the World Trade Organization. There are several RTAs entered by China with the member countries and several other RTA has been focussed for materialization in future. Japan which is a key member of the East Asian region have also focussed on participating in the RTA with the member countries in order to integrate its economy with that of the East Asian region and regain its leadership role in the regional economy. The rationale behind the RTAs entered by Japan with other member countries is to revive its own economic status that has been left alone in the due to the developments in the world economy and limitations of its economic policy in the long run. The rationale behind the intention of Korea to enter into RTA with the member countries is to support its export oriented growth strategy for economic development. Korean policy makers have emphasized that the increase in RTA with the other members in the East Asian region is a positive step to realize the objectives of the nation to develop into a business hub (Sam, 1999, p.1185). The efforts of the East Asian countries in participating in the regional trade agreements have led to the economic integration of the region that has resulted into formation of bodies like ASEAN (Association of South East Asian Nations) and APEC (Asia Pacific Economic Co-operation). ASEAN comprises of South East Asian countries like Indonesia, Thailand, Vietnam, Myanmar, Cambodia, Laos, Brunei, etc. The South East Asian countries that form ASEAN have extended their hands to boost economic co-operation to the North East Asian countries like China, Japan, Korea, etc and to their trading partners namely, New Zealand, Australia, US, India, etc. Some of the well known regional trade agreements entered by the East Asian countries that are effective in recent times are AFTA which is the ASEAN Free Trade Area, free trade agreements between China and ASEAN, China and Pakistan, China and Chile, Japan and Singapore, Japan and Mexico, Japan and Malaysia, Thailand and Laos, Thailand and Australia, Thailand and New Zealand, South Korea and Chile, South Korea and Singapore, Singapore and new Zealand, many others. The Asia Pacific Economic Co-operation is also a result of the extensive interest of the countries to participate in the regional trade agreements. The East Asian countries like China and Japan are key members of APEC. The total number of members in APEC is 21 countries that are focussed on multilateral co-operation. The increasing regional trade agreements as mentioned above in the region of East Asia could be rationally justified due to the slow down of the region’s economy and rising need of expansion of the investment and trade for mutual development of the East Asian economies. The growth of regional trade agreements between the East Asian members with ASEAN as the centre point of international trade has developed due to the underlying objectives of reviving the individual position of the member economies from financial crisis and to gradually assert the dominant position of the economy of East Asia in the world stage (Baier and Bergstrand, 2001, p.25). Evaluation of the economic impacts of RTAs on East Asian countries The rise in the number of regional trade agreements between the member countries of East Asia could also be supported with the help of the empirical theories like traditional trade literature, new trade theory and hub-spoke pattern of international trade. The traditional trade literature suggests that the increase in the international trade between the members countries participating in RTAs lead to the economic cooperation for free flow of goods and services. The new trade theory also supports this view and explains that the increase in regional trade has emerged as a result of the policy changes by the member countries in order to meet the challenges of economic crisis and assert their individual economic positions in the international platform (Baldwin1, 1993, p.4465). The application of the hub and spoke theory in the model of economic cooperation among the East Asian countries reveal that the East Asian economies have entered into regional trade agreements with each other in order to take the advantages of the multilateral trade between the member countries in the region and assert their dominance in the world platform. ASEAN has always been the hub of regional trade in the East Asian region with the member countries like China, South Korea and Japan entering into regional trade agreements and also among each other. Advantages The advantages of regional trade agreements among the East Asian member countries lay in the effective role of ASEAN as an effective hub that is extending the regional trade agreements with neighbours of North East Asia and global trading partners like Australia, New Zealand, India, US, etc. As a result of the regional trading agreements between the members of East Asian economy, there has been reduction in the barriers to trade and taxes. Due to the reduction in the trade tariffs, the East Asian economies have engaged more into trade interaction with each other. The regional trade agreements have been in line with the economic reforms undertaken by the countries in East Asia (Baldwin2, 2004, p.16). Due to the openness in the economy and the policies of encouraging investments by the neighbouring countries, the regional trade agreements are symbols of increasing efforts towards international co-operation in trade and commerce. The reduction in tax rates, trade tariffs are economic incentives that have encouraged the member countries to engage in international trade and commerce. The scope of free exchange of trade and commerce among the member countries has led to the increase in the flow of goods and services between the member countries. The free trade practices allowed under the regional trade agreements have allowed the countries to facilitate the free flow of factors of production among the member countries. The comparative advantages of members like China, Korea, Japan, etc. have enabled them to attract investments and the countries have taken advantage of the free trade to centralize the factors of production. This has led to increase in trade and commerce in the member countries in East Asia (Benedictis, Luca, Santis and Vicarelli, 2005, p.15). The prospects of attaining increasing profits due to the trade activities in the tax free zones have led to increase in investments of the East Asian economies. Limitations The regional trade agreement between the member countries in East Asia that has developed rapidly in the past decades has certain limitations. The exchange of trade of commerce due to the free flow of goods and services between the East Asian countries have led to the increase in the economic status of the member countries as the investments in the economies grew largely supported by the treaties of taxes, tariffs and investment guarantees and sharing of factors of production present in the economies (Baldwin and Venables, 1995, p.48). This has resulted in the increase of competition between the member countries as these members have underwent rapid economic growth in a short span of time due to the rise in international trade. The economies like China, Japan and South Korea have emerged as rapidly growing economies and have initiated efforts of building their capabilities of sustaining the infrastructural growth required for the increase in multilateral investments (Bhagwati, Greenaway and Panagariya, 1998, p.1138). The members who have been in relatively superior economic status as compared to the other members in East Asian economy may tend to control the common policies for trade and investment in the region. For example, China which has attained a relatively superior position in the East Asian economy has controlled the common trade policies of trade in the East Asian economy (Bergsten, 2001, p.12). After a certain stage of economic development in the region, the role of China has transformed more as a controlling member influencing the terms of trade in the economic of East Asia. Conclusion The evaluation of the economic impacts due to regional trade agreements in the East Asian economy reveal the advantages of the regional economic cooperation between the member countries. The advantages of tax and tariffs, investment securities have provided economic incentives to the countries to engage into multilateral trade. Due to the free trade policies and removal of trade barriers between the member countries, the flow of goods and services between the East Asian economies have increased. This has increased the volume of investment and trade in the East Asian economy. The collaboration of trade and commerce between the East Asian economies has led to the transfer of the factors of production between the economies of East Asia. The labour and capital were accessed the member countries engaged in the regional trade agreements at low cost. This is due to the fact that the countries enjoying comparative advantage due to the availability of resources in the geographical boundaries were shared by the members of regional trade agreement. The model of spoke and hub has been followed in the East Asian region with the ASEAN countries functioning as a hub and the North East Asian countries entering into regional trade agreements. The regional trade agreements between the East Asian members also posed certain limitations to the economic development of the region. The regional trade agreements are against the guiding principles of the World Trade Organization in terms of discrimination in the trade practices. Although the regional trade agreements have provided the instrument to the member countries for exploiting the advantages of international trade, there has been a conflict of power as the member countries in the East Asian economy have undergone different rates of economic growth. China has experienced the highest rate of growth among other members in the East Asian economy for which the common economic policies of the region has been influenced by them. This has created disparity among the members of the region in terms of economic growth and development. References Baier, S. L. and Bergstrand, J. H. 2001. The Growth of World Trade: Tariffs, Transport Costs, and Income Similarity. Journal of International Economics. 53(1), pp.1-27. Baldwin, R. and Venables, A. 1995. Handbook of International Economics. Amsterdam: Elsevier Science Publishers. Baldwin1, R. 1993. A Domino Theory of regionalism. NBER Working Series Paper. 1(1), pp.4465. Baldwin2, R. 2004. The Spoke Trap: hub and spoke bilateralism in East Asia. KIEP Research Series. 1(1), pp.14-18. Benedictis, D., Luca., Santis, R. D. And Vicarelli, C. 2005. Hub-and-Spoke or Else? Free Trade Agreements in the Enlarged EU: A Gravity Model Estimate. Working Series Paper, European Network of Economic Policy Research Institute. 1(1), pp.12-16. Bergsten, C. 2001. Fifty years of Trade Policy: The Policy Lessons. The World Economy. 1(1), pp.1-13. Bhagwati, J., Greenaway, D. Q and Panagariya, A. 1998. Trading preferentially: Theory and Policy. The Economic Journal. 1(1), pp.1128-1148. Carolyn, F. 2000. Different paths to Free Trade: The Gains from Regionalism. Quarterly Journal of Economics. 1(1), pp.1317-1341. Drake-Brockman, J. and Drysdale, P. 2002. Regional Economic Integration in East Asia. Pacific Economic Papers. 1(1), pp.8-12. Drysdale, P. 2005. Regional Cooperation in East Asia and FTA Strategies. Pacific Economic Papers. 1(1), pp.16-19. Sam, L. 1999. Regional Trade Agreements: Dangerous Liaisons?. The World Economy. 22(1), pp.1179-1200. Wilfred, E. J. 1998. The New Regionalism. The Economic Journal. 108(1), pp.1149-1161. Read More