Multilateralism & bilateralism

Since the 1997-98 financial crisis, a new trade arrangement has begun to emerge in East Asia that represents a clear break from the region's strong history of multilateralism. The countries of East Asia are now giving more attention to ways of expanding intra regional trade that include the establishment of regional trade agreements; plans to establish a free trade area involving the economies of ASEAN and China; as well as moves towards bilateral trade agreements.

Such a development is important given that an export-led growth and development strategy has provided the platform for the region's remarkable and prolonged period of high and sustained economic growth since the 1960s. Thus this trend towards bilateralism and the new regionalism, the motivations behind them, their impacts upon the region, their future evolutions and prospects are of profound regional and also global significance.

Therefore in this report, we shall explore the reasons for the shift from multilateralism to bilateralism, which is rapidly emerging in the wake of the 1997-98 economic crisis and we shall also focus upon the role of regionalism in East Asia in recent years. In doing so, the report will proceed as follows. Chapter 2 presents a brief background on the Asian Financial Crisis. Chapter 3 looks at the trade arrangements in East Asia before 1997. Chapter 4 discusses the reasons for shift from multilateralism to bilateralism. Chapter 5 looks at the new trade approach after 1997 and its impacts upon the region.

Chapter 6 focuses on regionalism and its progress so far in East Asia. Chapter 7 elaborates on the various roles of regionalism, emphasising on its importance especially after the crisis. Last but not least, chapter 8 will discuss the effects of regionalism in East Asia before we present our concluding remarks in chapter 9. Chapter 2: 1997-98 Asian Financial Crisis1 The financial and economic crisis of Asia in 1997 struck East Asia, bringing an end to its miracle and the myth of its growth. The confidence level in East Asia then declined to a new low in the short aftermath.

This financial turmoil arose out of a twin crisis, combining an externally driven currency with an internally induced banking crisis. Originating from Thailand, the crisis quickly spread to other East Asian countries. In early July 1997, Thailand had to devalue its currency, the baht by about 20% against the US dollar, as a result of intense pressure in the foreign exchange market. Currency speculators and many Thai residents were trying to sell the baht and buy the US dollar, as the Thai government was running out of its foreign reserves and was also losing market confidence in maintaining the currency value and financial stability.

This resulted and worsened the capital flight out of the country. Interest rates then shot up, leading to the collapse of previously inflated stock and real estate markets. Thailand thus faced its worst recession in the post-war period with sharply rising unemployment and business failures. Other neighbouring countries were not spared too, as the devaluation of the baht made Thai exports cheaper, pressuring other currencies to follow suit2. This led to subsequent turmoil in the financial markets and the economy of several East Asia countries3, especially Indonesia and South Korea.

From the speed of spread of this economic crisis, the depth of interdependence among East Asian countries is clearly revealed. Each country thus becomes more aware of the need to establish meaningful trade agreements, so as to facilitate the exchange of information and thereby promoting cooperative actions among them. Chapter 3: Trade Arrangements in East Asia before 1997 Until the Asian crisis erupted in 1997, East Asia is comprised of countries that did not show much interest in forming preferential trade arrangements, whether intra- or inter-regionally. Preferential trade just represented a mere 3% of the total trade for Asia.

East Asian countries instead pursued a multilateralism approach to trade throughout the post-war period under the GATT/WTO regime, unlike Western European countries and the United States. One such arrangement is Asia-Pacific Economic Cooperation (APEC), which is formed in 1989 by 21 nations4 from three continents. It accounts for more than 2. 5 billion people, a combined GDP of 19 trillion US dollars and 47% of world trade. The member economies of APEC seek to create efficient domestic economies and increase exports by reducing their tariffs and other trade barriers.

For instance, Japan supplies the essential capital goods, while Hong Kong, Taiwan and Singapore provide finance, design and marketing expertise. Thailand, China and Indonesia on the other hand focus on labour-intensive operations. This arrangement in turn allows APEC member economies on average to enjoy lower cost of living because of the reduced trade barriers and a more economically competitive region. The next form of multilateral trade agreement entered into by East Asian countries is ASEAN Free Trade Area (AFTA), which is initiated in 1992.

It has 10 members, consisting of Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Lao, Myanmar and Cambodia. The members seek to eliminate non-tariff barriers and quantitative restrictions, harmonize customs nomenclature, valuation and procedures and also to develop common product certification standards. It is hoped that with ten integrated markets of a population exceeding half a billion people, the member countries will be much more attractive for large-scale direct investment, as compared to a collection of relatively small, segmented markets.

Several East Asian countries5 also joined the World Trade Organisation (WTO) and signed the General Agreement on Tariffs and Trade (GATT), which was designed to provide an international forum that encouraged free trade between member states by regulating and reducing tariffs on traded goods and by providing a common mechanism for resolving trade disputes. Chapter 4: Reasons for Shift from Multilateralism to Bilateralism As mentioned above, East Asian financial crisis demonstrated the risks of contagion in financial market and exchange rate instability.

This arose from the high economic interdependence of the region. The crisis showed that rapid deceleration of one country's currency could adversely affect the export competitiveness of other neighbouring countries exporting the same products. The policies initiated by IMF to ease the crisis only seek to open up Asian market for Western firms and protect the interest of Western lending institutions at the expense of Asian workers. This spurred great dissatisfaction among Asians.

Coupled with the fact that export growth will remain a key factor for the post-crisis recovery and greater economic growth and welfare of the region, East Asian countries are now exploring new forms of economic cooperation to increase trade and home-grown defences so as to reduce the risks of financial contagion and exchange rate instability. In order to increase trade, East Asian countries can engage in multilateral trade. However, multilateralism system is not making much progress. Since the set up of WTO, it has not been able to solve problems in the way of global free trade.

In 1999, failure of WTO in Seattle to solve deep difference on farm subsidies and labour standard between 135 member nations illustrated the difficulty of comprehensive multilateral liberalisation of market access. This is further illustrated by the difficulty of reaching an agreement at Doha, in which WTO abandoned the March 31 2003 deadline for an outline agreement on Farm trade and also the current collapse of World Trade talk to free up world trade. Since WTO failed to solve these problems, East Asian countries have to look into regional or bilateral agreements to increase trade.

Morover, APEC has made little accomplishment, as membership only requires a verbal commitment to reform and cooperate and such is not enforceable. There are no formal agreements, and each state progresses at its pace within self-determined parameters. APEC thus has failed to promote economic reform or lower trade barriers because it is committed to "concerted unilateralism" or the notion that members will undertake agreements unilaterally, rather than negotiate formally and sign treaties.

There is little incentive for countries to reduce informal trade barriers because negotiation and pressure are deemed too confrontational. APEC thus symbolized the old approach to economic cooperation in Asia, which emphasized informal cooperation and consensus building. Dramatic economic growth before the crisis papered over the drawbacks of this approach. Hence once the economic crisis set in, cooperation vanished. Failure of APEC to play an significant role in responding to the crisis and frustration of the ineffectiveness of trade liberalisation cause East Asian countries to look into bilateral trade agreements.

Another reason that caused East Asian to shift to bilateralism is the unimportant regional trade agreement (RTA) in Asia. Intra-ASEAN trade among the ASEAN-6 rose from US$24 billion in 1985 to US$143 billion in 1997, with most of the intra-trade taking place between Singapore and Malaysia. This is only an inched up from 18% of total trade in 1985 to 20% of the total trade in 1997, which is considered very low. As mentioned above, in 1993-97, preferential trade only represented 3% of the total of Asia. This is due to the diverse economic goals, culture and living standard in Asian countries.

Moreover, since liberalisation in Asian countries had been successful without the need to change their economic institution, they have been generally distrustful of regional agreements, which are deemed to be less successful. After the financial crisis, East Asian countries want to reduce the risk of financial contagion and exchange rate instability and also to increase their export growths. However the failure of WTO and little accomplishment of APEC and RTA make it difficult for East Asia to increase its trade, hence explaining its shift from multilateralism to bilateralism after the financial crisis.