The Asian Economic Integration Cooperation Agreement: Lessons for economic and social development

UNCTAD Research Paper No. 3

Global trade integration has proceeded at a fast pace since the founding of the GATT/WTO and numerous trade agreements have been signed under the institution's provisions. Regional trade agreements started to proliferate from the 1980s, and in the 1990s regionalism re-emerged as a major driver of trade liberalization and integration both in developed and developing regions. Important agreements came into force across developing countries including ASEAN, MERCOSUR, NAFTA, COMESA, and CACM.

The trend, as well as GDP growth in developing countries, is depicted in figure 1 and developing Asia stands out. Even if around 267 RTAs have been notified to the WTO (WTO, 2016) in reality more than 8,000 bilateral trade relationship pairs within RTAs are currently in place, and one-third of such relationships correspond to Asian agreements.

The rising wave of free trade agreements as a trade policy instrument has led to the transformation of Asia from one of the poorest globally to 'Factory Asia' (Baldwin, 2011). Despite rapid liberalization, whether bilateral or regional, pinning down how regional integration addresses member countries' development concerns is challenging.

The paper focuses on the integration process between countries in ASEAN. It discusses the main achievements resulting from the ASEAN agreement, particularly in terms of growth, trade and investment. In addition to solid economic growth, rapid trade and investment expansion made possible by regional liberalization, ASEAN members have made other important inroads in terms of structural change as compared to other developing regions. This includes higher rates of productivity in tradable goods, and the shift from primary products towards manufacturing and services.

The paper also discusses challenges concerning the development gap - measured by various socioeconomic indicators - between ASEAN members, which range from LDCs to high income economies. Traditionally, the implications of RTAs have been assessed focusing on market access issues while sidelining broader development implications. Yet regional integration could serve as an instrument for development by increasing trade, investment and employment. In addition to these traditional channels, regional integration can also impact poverty by encompassing regional socio-economic projects providing infrastructure and regional public goods. Thus, the type and scope of the regional integration process may be relevant for poverty reduction.

The ASEAN Free Trade Agreement expressly emphasizes the development dimension of trade integration by addressing the inequalities amongst its members. In this context, the paper evaluates the pillars of regional integration that could impact development, and the eventual convergence of the members' development gap, including poverty reduction and trade diversification. In this setting, domestic policies to compensate for possible negative shocks of integration are crucial (Gallagher et al, 2015).

Despite the manifest gains regionalization also brings about costs. The well-known puzzle of overlapping RTAs described by Bhagwati (1991) as 'spaghetti bowl', and subsequently Baldwin's (2004) 'noodle bowl', referring to the proliferation of trade agreements in Asia may adversely affect the welfare-enhancing potential of regional agreements. A key challenge is harmonizing the array of barriers related to international production networks prevailing in Asia, given the high interdependence of manufacturing exporters in intra-regional trade (Baldwin, 2015). Also, addressing the diverse priorities, institutional capabilities and policies of member countries in a cumbersome net of agreements is a matter of concern.

The paper proceeds as follows:

  • Section 2 discusses ASEAN's socioeconomic progress.

  • Section 3 looks at the role of regional integration in addressing the development gap in ASEAN.

  • Section 4 concludes and discusses policy implications.

22 Jul 2017