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1 ISS Discussion Paper Series F-162 Regionalization and Regionalism in East Asia Hiroyuki Hoshiro1 1 Institute of Social Science, The University of Tokyo (hoshiro@iss.u-tokyo.ac.jp) 2 Introduction Since the end of the 1990s, an “East Asian Community” has attracted considerable attention. A number of policy makers, academic scholars, and business executives have discussed the possibility of the creation of a regional framework in East Asia 2 Regionalization is defined as an increase in the cross-border flow of capital, goods, and people within a specific geographical area. It develops from the bottom up through societally driven processes coming from markets, private trade, and investment flows, none of which is strictly controlled by governments. The core players are non-governmental actors—firms or individuals. Regionalization can be called a spontaneous, bottom-up process. In contrast, regionalism is defined as a political will (hence ism is attached as a suffix) to create a formal arrangement among states on a geographically restricted basis. Since its main participants are governments, it can be expressed as an artificial, top-down process. The “development of regionalization” means an increase in the number of regional economic transactions such as money, trade, and foreign direct investment (FDI). “Regionalism in progress” refers to the agreement of regionally close governments to establish kinds of formal institutions such as the Asia Pacific Economic Cooperation (APEC), the East Asia Summit, or bilateral preferential trade agreements (PTAs) in order to cooperate with each other on various issues. Few scholars oppose the idea that both regionalization and regionalism in East Asia have been developing since the Asian financial crisis of 1997 . Concerning this topic, there is mutual agreement among international relations scholars that “regionalization” and “regionalism” are different phenomena, but there are unresolved arguments as to whether there is a causal relationship between the two. 3 However, there is a huge disagreement over the relationships between the two phenomena, in particular, the causal relationship between regionalization and regionalism. One dominant view emphasizes that regionalization automatically promotes regionalism. Contrary to this widely shared view, however, some scholars . 2 “East Asia” here consists of the ASEAN 10 countries and Australia, the People's Republic of China (hereafter China), India, Japan, New Zealand and the Republic of Korea (hereafter South Korea). 3 However, as I will mention below, Ravenhill (2010) doubts this understanding. 3 argue that regionalization is not necessarily a catalyst for regionalism. Moreover, because of the complexities of the relationship between the two, some scholars have given up attempting to untangle this problem. The purpose of this paper therefore is to shed light on the relationship between regionalization and regionalism by use of statistical analyses for East Asian countries. Since a number of political scientists and economists have verified that regional arrangements (the outcome of regionalism) lead to regionalization, this paper focuses on the reversed vector, that is, it investigates whether regionalization promotes regionalism4 . 1 Existing Research on Regionalization and Regionalism Since the mid-1990s, a certain number of scholars in international relations have emphasized the necessity of distinguishing between regionalization and regionalism as analytical concepts and of clarifying the relationship between the two （Fishlow and Haggard 1992; Haggard 1993; Frankel 1993; Wyatt-Walter 1995; Pempel 2005）. From this time on, many scholars have wrestled with this issue. First, there is a widely shared view that regionalism leads to a growth in trade, that is, it is one demonstration of economic regionalization （Aitken 1973; Frankel 1993; Winters and Wang 1994）. Clearly, this argument is not surprising. As a result of a decrease in tariffs and non-tariff barriers between two or more countries concluding trade arrangements, a so-called “trade creating effect” would cause an increase of trade among members. According to research that uses a CGE（Computable General Equilibrium) model, if East Asian-wide PTAs (ASEAN+3 or ASEAN+6) were established, for example, the economic growth of each member would increase (Kawai and Wignaraja 2009, 19-20). Moreover, some argue that not only trade but also FDI would increase if trade agreements were concluded. Since international institutions, such as PTAs, enable governments to make more credible commitments to a liberal economic policy and prevent even 4 As only institutionalized regional agreements in the region are PTAs, I refer to regional arrangements and PTAs interchangeably. This definition is consistent with that of Mansfield and Milner (1999, 592). 4 developing countries from making arbitrary interventions such as regulation, taxation, or tariff increases, foreign investors can safely make investments in countries joining regional trade arrangements (Büthe and Milner 2008). However, the economic effect of some individual PTAs in East Asia has not been so clear. Ando (2007), for example, concludes that the Japan-Singapore EPA (Economic Partnership Agreement) has had little impact on trade. Dent (2010, 218) also does not rate the Singapore-Peru PTA, inferring that the expected annual trade and investment liberalization “gains” are possibly less than the actual administrative cost of negotiating and implementing the agreement itself. Thus, there are cases where participation in a regional trade arrangement does not necessarily lead to an increase in economic interaction in East Asia5 I will now examine the reversed vector, that is, whether increased regional economic interdependence (regionalization) encourages governments in the region to conclude or join economic arrangements such as PTAs (regionalism). The number of PTAs has been increasing worldwide since the early 1990s and this tendency is particularly remarkable in East Asia after 2000 （Figure 1）. Can this be explained by enlarged economic interdependence in the region? . At present, there are two competing views on this issue. The dominant view asserts that regionalization is an inevitable driving force for regionalism. For example, Kawai (2005, 30) argues that “[the] most fundamental rationale behind the emergence of recent economic regionalism is the deepening of regional economic interdependence in East Asia.” Munakata (2006, 29) shares Kawai’s stance by emphasizing that the intensity of economic interaction contributes substance and depth and thereby a basis for institutionalized intergovernmental cooperation, including preferential trade agreements （see also Lim 5 Although not the subject of this paper, the question of why states try to conclude PTAs even though their expected economic effects are low is interesting and merits further research and investigation. 5 1990, 21）. Furthermore, Lincoln (2004, chap. 3) takes a negative view as to the necessity and economic effect of East Asian regional trade arrangements because he argues that intra-regional trade has been decreasing rather than increasing and identifies Japan’s economic decline as the main factor in this. This logic derives its meaning from the assumption that growth in regional economic interaction drives regionalism. All of these views seem to be based on a conventional international relations thesis—institutions lower transaction costs, reduce uncertainty, monitor compliance, and enhance opportunities for more cooperation (Keohane 1984). Contrary to this thesis, some scholars are skeptical about this simple, linear relationship. Ravenhill (2010, 182) insists that regionalization in East Asia has indeed been decreasing if we look at row shares in trade, which show the region’s changing share of global commerce via the trade intensity index6 This existing research does have flaws, however. It does not examine the relationship between the two phenomena systematically. The former is no more than policy recommendation without empirical evidence (and does not even make an effort to probe its own arguments). The latter suffers from a similar problem. Ravenhill (2010, 185) points out the odd relationship (from the perspective of existing studies) between China and other countries—those countries that have experienced trade increase with China but have actually eschewed PTAs with it—as an illustration of his arguments. However, this illustration is drawn from a small number of cases, as well as from outcomes, suggesting that selection bias have occurred. Moreover, Ravenhill’s main argument is to reject increased economic interdependence (regionalization) in East Asia, not the relationship between regionalization and regionalism itself . Therefore, Ravenhill argues that this is not consistent with the widely shared view that both regionalism and regionalization in East Asia have been increasing since the late 1980s. Moreover, Haggard (1997, 45) suggests the possibility that regionalization may prevent regionalization, by stating that “despite—and arguably because of—the extremely rapid growth of trade and investment, there has not been strong demand within Asia for greater policy coordination.” 7 6 Ravenhill shares this understanding with Lincoln (2004). . 7 In this point, Ravenhill (2010, 185) seems to accept the argument that PTAs are negotiated in 6 The influence of regionalization over regionalism has thus not been fully examined. It is natural for some studies to avoid attempting to make clear which is cause and which is consequence and to simply describe these relations as a “mutual reinforcement process” （Dent 2008, 8）. The aim of this paper, therefore, is to settle the dispute by examining systematically the relations between regionalization and regionalism by means of statistical analyses of East Asian trade data from 1948 to 2010. 2 The Method and the Model The statistical method employed here is called “event history analysis” or “survival analysis.” Since this paper aims to estimate the influence of regionalization over regionalism (PTAs), the dependent variable is a binary outcome denoting whether a PTA exists or not—it equals 1 if a PTA exists between state i and state j, 0 otherwise. The most important independent variable is the amount of trade in the region from 1948 to 20108 response to the policy challenges posed by increasing interdependence. He points out that East Asian countries have concluded or are currently negotiating with states outside the region that have been experiencing growth in economic interaction with the East Asian countries. . A normal maximum likelihood method, such as logistic regression, raises the problem of endogeneity, that is, if two countries concluded a PTA in 2005 for instance, the amount of trade after 2006 would be affected by the agreement, which is the dependent variable. Since this paper analyses the influence of economic factors over PTAs and not vice versa, the analysis should end once partner countries enforce a PTA. Therefore, conclusion of a PTA is read as the occurrence of the event (this is also called “failure”) and probability of it is estimated. Survival analysis is the most appropriate statistical method for the purposes of this paper. The two country pairs that have not signed PTAs, such as US-Japan, are called “right censored” data. Since this analysis includes time-varying covariates (TVCs), such as the amount of trade or GDP, I have used a discrete-time model. Data are shown in Table 1 below. 8 As mentioned above, regionalization refers to a general term including increased trade, FDI, and emigration within a specific region. Therefore, the amount of FDI and emigration should be incorporated into independent variables. However, due to difficulties of data accessibility (especially data for Southeast Asian nations), I use only trade data here. I will try to include FDI and emigration data in future research. 7 The unit of analysis is a dyad product year and the dyad is cross-country data. East Asia is defined here as ASEAN+6—the original members of the East Asian Summit. Since ASEAN has unusually had PTAs with individual countries as if they are a single unit, ASEAN is regarded as a country. Therefore, the total number of countries is 179. However, given the fact that many of the current PTAs that East Asian governments have been concluding are cross-regional trade agreements (Katada and Solís 2008), I have expanded the data to APEC countries (except Taiwan)10 in a different model. Dependent Variable PTA data as a dependent variable are drawn from the WTO website11 9 These are ASEAN, Australia, Brunei Darussalam, Cambodia, China, India, Indonesia, Japan, Republic of Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. (see also Figure 1). If a country has PTAs with the same country more than twice through bilateral or multilateral negotiations (for example, China has PTAs with ASEAN, signed in 2005, as well as with Singapore, signed in 2009), I have chosen the bilateral one because bilateral agreements are expected to have a more direct economic impact than multilateral ones. Moreover, if countries concluded more than two multilateral PTAs separately (Indonesia and Malaysia, for example, joined the GSTP [Global System of Trade Preferences among Developing Countries] in 1989 and the AFTA [ASEAN Free Trade Area] in 1992), I have chosen the earlier one. In the case of ASEAN, if a country has PTAs with ASEAN but not with individual ASEAN countries, only the PTA with ASEAN is counted. For example, since New Zealand concluded a PTA with ASEAN in 2010 but not with the Philippines, I have counted only the ASEAN-New Zealand PTA, not the New Zealand-Philippines PTA. 10 Taiwan is excluded because no data are found in the IMF Direction of Trade Statistics Dataset. The added countries are Canada, Chile, Hong Kong, Mexico, Papua New Guinea, Peru, Russian Federation, and the United States. 11 http://www.wto.org/english/tratop_e/region_e/region_e.htm (accessed February 6, 2012). 8 Independent Variables First, the most important variable is an enlarged economic interdependence (regionalization). I measured this as the volume of trade between two countries. Trade data are taken from IMF’s database whose timeframe is from 1948 to 2010 12 . As PTA negotiations normally take two to five years from initiation to completion, I have taken three years’ lag on the amount of trade (import plus export, expressed in US dollars) as an independent variable13. Moreover, not only nominal value but also relative value (the amount of trade between country j and country i divided by the sum of the total amount of j’s worldwide trade and i’s worldwide trade)14 Furthermore, since regionalization implies an ongoing process, continuity of growth in economic transactions may be more important than just one term’s trade. Therefore, INCREASE(NO) and INCREASE(RE) are operationalized as dummy variables that take a value of 1 if the amount of trade (whether nominal or relative) had been increasing for five consecutive years in year t-3, and 0 otherwise. If the argument that regionalization leads to regionalism is correct, the following hypothesis will be confirmed. is taken as an independent variable. The natural logarithm of the nominal trade is named LN_TRADE(NO) and the relative one TRADE(RE) in year t-3. H1: the greater the amount of trade (or if this is continuously increased), the greater the likelihood that a pair of countries conclude PTAs. Coefficients of LN_TRADE(NO), TRADE(RE), INCREASE(NO), and INCREASE(RE) are expected to be positive. Contrary to this linear relationship, some scholars have pointed out that bilateral PTAs in East Asia are not between pairs of countries that have expectation of a high trade creation 12 IMF Direction of Trade Statistics Dataset, various years. If two countries’ data are not corresponded, I used the developed countries ones. 13 Both four and five years’ lags are also estimated as Model1-2 and Model1-3 respectively. 14 Formally, Tradei, j (t-3)/(Tradei,world(t-3) + Tradej,world(t-3)). 9 effect nor those that have a large amount of trade interactions （Endo 2006; Ravenhill 2010; Dent 2010; Solís 2011）. A large amount of trade means each country is also large economically and this leads to an increase in the number of social economic actors—veto players—which have a vested interest in foreign trade and tend to make policy change difficult (Tsebelis 2002). They may prevent governments from promoting PTAs. Furthermore, there seems little incentive for a government to invest time and money in concluding PTAs with those with whom they have few trade relations. Therefore, the relationship between the amount of trade and PTAs is assumed to be an inverted U-shaped curve. So new variables, LN_TRADE(NO)_SQ, TRADE(RE)_SQ, DIFGDP, and DIFGDP_SQ are introduced. LN_TRADE(NO)_SQ and TRADE(RE)_SQ are the square of LN_TRADE(NO) and TRADE(RE) respectively. DIFGDP is measured as the absolute value of difference of the natural logarithm of nominal GDPs (Gross Domestic Products) between pair countries15. DIFGDP_SQ is the square of DIFGDP. GDP data are from the World Bank’s Data Catalog16 . If previous studies are right, the following hypothesis will be correct as well. H2: The larger (and smaller) the amount of trade, the less likely a pair of countries have PTAs. LN_TRADE(NO)_SQ, TRADE(RE)_SQ, and DIFGDP_SQ are expected to have negative coefficient. Counter to these hypotheses, I expect those variables are not significant at all. As regional economic ties are already strong in East Asia17 15 |ln GDPi - ln GDPj| , the incentives for policy makers and business elites to create formal arrangements should be weak. The purpose of trade arrangements is to increase trade. Why do governments need to conclude new agreements when economic transactions are already increasing sufficiently? This de-fact integration might have prevented an EU-type regionalism in the region. That is: 16 http://databank.worldbank.org/ddp/editReport?REQUEST_SOURCE=search&CNO=2&topic=3 (accessed February 26, 2012) 17 This is often called “de-fact integration.” 10 H3: Growth in trade between pair countries has no effects on PTAs. Other Independent Variables Although it is not the objective of this project to seek determining factors for increased PTAs in East Asia, other independent variables are introduced in order to control the main variable mentioned above. These other variables are the number of worldwide PTAs in the previous year, a dummy variable which indicates whether two countries are