2009-E-8
Proliferation of FTAs and the WTO
Shujiro URATA
Waseda University
January 2010

An earlier version of this paper was presented at the International Seminar incelebration of the 20th Anniversary of KIEP “The World Economy with the G-20”
co-organized by CEPR and KIEP on November 20, 2009.

I. Introduction
Global financial and economic crisis, which was triggered by the Lehman
shock in September 2008, has had enormous negative impacts on the global economy.
Global GDP growth rate became negative in the fourth quarter of 2008 and continued
negative through the third quarter of 2009, while global trade in goods and services is
projected to register -11 percent in 20091. The magnitude of the decline in economic
activities was so huge that this crisis has been characterized as “once in a century”
crisis, comparable only to the Great Depression in the 1930s.
This crisis, which began in the US, spread to the rest of the world mainly
through two channels. One is the financial market, where supply of financial resources
declined, thereby resulting in slowing down of economic activities. The other channel
is foreign trade. As demand for imports in the US, which absorbed huge amount ofimports from the rest of the world, especially from East Asia, before the crisis,
declined, the countries, whose dependence on exports to the US was high, sufferedtremendously.
Faced with the global financial and economic crisis, G-20 Leaders’ meeting
was convened in November 2008, to discuss the ways to deal with the crisis and to findthe way for recovery. They called for joint actions on expansionary macroeconomic
policy as well as appropriate financial regulation measures. Furthermore, the leadersconfirmed the importance of not resorting to protectionist policies.
Responding to the expansionary fiscal and monetary policies, many countries,
especially those in East Asia, started to recover in 2009. The situation on protectionist
policies is quite different. Although most measures do not violate WTO rules, many
countries, including the G-20 countries, have adopted a variety of trade distorting

1

IMF, World Economic Outlook, October 2009.
1

protectionist measures, which include the increase in applied tariff rates to the level
below the bound rates, provision of government subsidy to troubled companies, etc.
These protectionist measures undoubtedly distort trade flows, causing inefficiency inthe allocation of resources.
One would expect that the introduction of these protectionist measures slows
down and eventually stops, as economic recovery takes hold. However, it is not clear if
these protectionist measures will be rolled back to the pre-crisis situation because
industries protected by these measures would oppose the rollback. If not, litigationaccusing violation of the WTO rules is likely to arise.
The application of these protectionist measures could have been avoided, if
the WTO rules prohibit these protectionist measures. Despite these limitations, theWTO played a role of restraining the WTO members from adopting obvious
protectionist measures such as raising the tariff rates beyond the bound rates that are
outright violation of the WTO rules. Indeed, there is a view that the presence of the
WTO contributed to economic recovery by avoiding the beggar-thy-neighbour
measures like those adopted during the Great Depression period.
The global trading environment would have been more favourable to open andfree trade, if the WTO rules had been better established by dealing with the grayprotectionist measures. Improvement of the WTO trading system requires successful
WTO multilateral trade negotiation. However, the current round of multilateral tradenegotiations under the WTO, or Doha Development Agenda (DDA), has been
deadlocked. There are a number of problems behind this stalemate such as the decision
making system, issue coverage, treatment of developing countries, and others. The
controversy over agricultural trade policy between the US and India was the directcause of the breakup of the DDA in July 2008.

2

Faced with the deadlock in the DDA, many countries have turned to free trade
agreements (FTAs), under which trade barriers are removed between and among themember countries, with a like-minded country (countries) concerning tradeliberalization. The interest in region-wide FTAs has increased in East Asia after thecrisis, as the East Asian countries realized the importance of reducing their dependence
on the US and European countries, to avoid the negative impacts of another crisis.
Since an FTA violates the most favoured nation (MFN) treatment of the WTO
members, one of the fundamental principles of the GATT/WTO, a surge of FTAs may
undermine the global trading system. It is known that global trade liberalization under
the WTO is the best policy for the world as a whole and that an FTA is at best thesecond best policy. As such, policy makers have to make every effort to revive andconclude the DDA. However, at the same time, it is important to make an assessmentof FTAs and try to formulate the policies that would turn FTAs into global FTA or
WTO liberalization, once one realizes that FTAs are not going to go away in the near
future.
With these observations in mind, in the remaining parts of the paper I will firstreview FTA developments in the world with a focus on East Asia, then I assess the FTA
developments from theoretical as well as empirical perspective. .In the course of the
discussions on the factors leading to the proliferation of FTAs, I will discuss some ofthe problems facing the WTO. I will then discuss possible ways of making FTAs turninto WTO trade liberalization. I will conclude the paper by presenting a few remarks.

II. Growing Bilateralism and Regionalism in the World and in East Asia

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FTAs have recently received a lot of attention in trade policy discussions. Thissection reviews recent developments in FTA formation. In addition to observing theincreasing trend of FTA formation, I discuss the reasons behind the trend.

II.1 Proliferation of FTAs in the World
The number of regional trade agreements (RTAs) began to increase notably inthe 1990s (Figure 1). 2 The pace of the increase accelerated in the mid-1990s.
Recognizing that FTAs, which violate the most-favored-nations treatment among the
GATT/WTO members, one of the principles of the GATT/WTO system, the speedy
spread of FTAs after the establishment of the WTO, which was set up to improve theworld trading system under the GATT, is ironic and also reflects difficult problems
facing the newly established WTO3. As of October 2009. the cumulative number of
FTAs in force reported to the GATT/WTO stood at 195. Among the many FTAs, theNorth American Free Trade Agreement (NAFTA) involving the United States, Canada,
and Mexico had significant impacts on the rest of the world. The establishment of the
NAFTA was seen by the rest of the world as the change in the US policy toward FTAs,
as the US appeared to have pursued the multilateral approach toward tradeliberalization under the GATT. This impact was substantial because the open and free2

RTAs include free trade agreement (FTA) and customs union. Under FTA FTA
members remove tariff and non-tariff barriers on trade among the members while they
maintain their own tariff and non-tariff barriers on trade with non-members. Under thecustoms union the members establish common tariff and non-tariff policies on theirtrade with non-members, in addition to free trade among the members. Since FTAs are
dominant among RTAs and a relatively small number of RTAs are customs unions andsince most if not all RTAs involving East Asian countries including Japan are FTAs, inthis paper “FTAs” are used to mean RTAs unless otherwise stated.
3 In the GATT/WTO, regional trade agreements (RTAs), which violate one of its basic
principles of non-discrimination, are permitted under GATT Article XXIV with several
conditions, which include liberalization of substantially all the trade of the members,
not increasing trade barriers on non-members, and completing the RTA process within
ten years. For developing members, more lenient conditions are applied under the
enabling clause.
4

US economy, the largest economy in the world, was regarded to play a pivotal role in
the open global trading system.
Several reasons can be identified behind rapid expansion of FTAs in recent
years. First, an increasingly large number of countries have become unsatisfied with
the WTO mainly because of the two reasons, turning to show an interest in FTAs. One
is slow progress in multilateral trade liberalization and the other is limited coverage of
WTO rules. Let us briefly discuss these points.
Many countries realize the benefits of trade liberalization as it has broughtthem economic growth 4 . Indeed, one of the important factors that led to rapid
economic growth for many countries in the WWII was substantial trade liberalization
carried out under the auspices of the GATT. However, multilateral trade liberalization
has become increasingly difficult to be carried out because of disagreement among the
GATT/WTO members, which have increased to exceed 150.
The Uruguay Round, which was the last multilateral trade negotiation of the
GATT, started in 1986 and was scheduled to reach agreement within four years.
However, it took twice as long as the initial schedule (eight years) to complete theround. After the WTO was established in 1995, developed countries demanded forlaunching a new round, but the opposition from developing countries, which were notsatisfied with the outcome of the Uruguay round prevented the WTO from starting a
new round. It was the end of 2001 when they actually agreed to start a new round(Doha Development Agenda, DDA). Although the DDA started, there was very little
progress and indeed it was stopped in July 2008. The direct cause of the suspension of
the DDA was the disagreement on agricultural liberalization between the US and India,
but there are other reasons such as dissatisfaction of many members about the DDA.

4

See, for example, World Bank (1993).
5

As was indicated earlier, increasingly large number of the WTO members has
made it difficult to pursue negotiations, as decision making in the WTO negotiations
requires consensus. Besides the large number of the members, various alliances such as
the Cairns Group, G-20, Friends of Agriculture, etc, which represent different interests,
have been formed, making the process of negotiation (or pre-negotiation) tenuous. One
can also argue that the increasing opposition to globalization has made it difficult topursue trade and liberalization under the WTO. Globalization has allegedly affected
some groups negatively in the forms of reduction in employment opportunities,
deterioration in environmental problems, and others. Indeed, in 1999 in Seattle, theWTO ministerial meeting, whose aim was to form consensus for starting a new round,was unsuccessful mainly because environmentalist groups, labor unions and NGOs
aggressively held anti-WTO demonstrations. Even after the WTO Seattle meeting,these groups have been carrying on radical campaigns against World Bank/IMF
conferences, G-7 summits and other conferences that seemed to support globalization.
Some WTO members are not satisfied with the coverage of the issue areas
under the WTO. The coverage of international economic activities expanded under the
WTO from the GATT, where the coverage was limited to goods trade. The WTO
expanded to include trade in services, investment, intellectual property rights, andothers which have become important in international economic activities. Although the
expansion of the coverage is a major achievement, there still are various areas which
are not covered under the WTO. Some of them include environment, labor standard,
movement of natural persons and e-commerce.
Many WTO members that are not satisfied with the slow progress in
multilateral trade negotiations and/or limited coverage of the WTO have opted forbilateral and pulurilateral FTAs with like-minded countries. Indeed, many FTA

6

negotiations have been concluded within short time period because of the small
number of participants. For example, Japan-Singapore FTA negotiations practicallytook approximately ten months. To deal with the limited coverage of the WTO, many
FTAs have included areas such as labor and environment.
Proliferation of FTAs was inflicted by the Domino effect, in that one FTA led
to another. Because an FTA is a discriminatory trade arrangement, a country that is
excluded from the FTA has an incentive to form its own FTA. A case in point was the
NAFTA, which led to the formation of the EU-Mexico FTA, which in turn resulted in
the formation of the Japan-Mexico FTA. European firms keen on expanding exports to
Mexico found themselves in a disadvantageous position vis-a-vis US firms, who havefree access to the Mexican market because of the NAFTA. These European firms put
pressure on their governments to establish an FTA with Mexico, leading to the
EU-Mexico FTA. The same story can be told behind the Japan-Mexico FTA.

II.2 Expansion of Bilateral and Mini-lateral FTAs in East Asia
East Asia was not active in the formation of FTAs until the turn of the century.
(Table 1) Indeed, ASEAN (Association of Southeast Asian Nations) Free Trade Area
(AFTA), which was established in 1992, was the only major FTA until Japan andSingapore enacted Japan–Singapore FTA (formally named a New Age Japan-Singapore
Economic Partnership Agreement, JSEPA) in 20025. However, the situation changed
dramatically in recent years. Many countries in East Asia began to form FTAs with thecountries not only in the region but also outside the region.
At the beginning of the FTA expansion period in East Asia bilateral FTAs suchas the Japan-Singapore and Chile-Korea FTAs were actively established. However, the5For discussions on FTAs in East Asia, see for example, Aggarwal and Urata (2006),
Urata (2005), and Sally (2006).
7

situation changed when China approached the ASEAN to form a mini-lateral
China-ASEAN FTA, treating the ASEAN as a group. Responding to the
China-ASEAN FTA, Japan quickly approached the ASEAN to form a Japan-ASEAN
FTA. Korea, India, Australia-New Zealand individually followed these movements to
set up an FTA with the ASEAN. As of mid-November 2009, the ASEAN has enacted
FTAs with China, Japan, Korea and it is expected to enact FTAs with India, andAustralia-New Zealand sometime soon. These developments indicate that the ASEAN
has become a hub of FTAs in East Asia as an FTA involving China, Japan and Korea,
the three largest economies in the East Asian region has not been established. Indeed,
no official discussions of such trilateral FTA have been initiated.
Two initiatives for establishing a region-wide FTA covering East Asian
countries have emerged, one covering ASEAN ten countries, China, Japan and Korea,
or ASEAN+3 countries (East Asian FTA, EAFTA) and the other including ASEAN+3
countries, India, Australia and New Zealand, or ASEAN+6 countries (Comprehensive
Economic Partnership in East Asia, CEPEA). EAFTA was proposed by an expert groupthat was set up to study a future vision of East Asia, while CEPEA was proposed by
Japan. Feasibility studies of these two initiatives were conducted by the private sector
study groups (track two groups) consisting of researchers from the respective member
countries. Following the recommendations of the study groups, the ASEAN+3 Leadersand ASEAN+6 Leaders agreed to begin official discussions in 2010.
The factors behind active formation of FTAs in East Asia are similar to those
discussed above for the explanation of the proliferation of FTAs in the world. In
addition, East Asian countries have regarded FTAs as an important regional policy
instrument. For example, China and Japan approached the ASEAN for the formulationof FTAs to deepen their economic and non-economic relationship with the ASEAN

8

with a hope to increase their influence in the region. Non-economic motives can also
be found for active FTA policy for the ASEAN, Korea, India, Australia and New
Zealand.
Two important features of implemented and proposed FTAs in East Asia may
be noted. One is the inclusion of economic cooperation as an important component andthe other is low level of trade liberalization. One of the distinguishable characteristicsof the East Asian region is wide diversity in the level of economic development among
the countries. In such a region reducing the development gap is important for achieving
economic growth as well as social and political stability. In order to achieve thisobjective, economic cooperation has become a central part of EAFTA and CEPEA.
Although it is commonly understood that FTAs with high level of trade liberalization isdesirable for achieving economic growth in the long run, many FTAs in East Asia haveadopted a pragmatic approach of excluding politically sensitive sectors from tradeliberalization. One notable case is the exclusion of agriculture from trade liberalizationin many FTAs, most evidently in the case of FTAs involving Japan.
While East Asian wide initiatives were being discussed, the US proposed an
FTAAP, or Free Trade Area of the Asia-Pacific covering 21 APEC member economies
in 2006. Behind the US proposal of an FTAAP is a concern that the US would be
excluded from East Asia. It should be noted that the differences in the members
between ASEAN+6 and APEC give rise to important implications of the groupings.
Taiwan and Russia, important economic players, are included in an FTAAP but not in
ASEAN+6, while India, a member of ASEAN+6, is excluded from FTAAP.

III. FTAs and Global Trade Liberalization under the WTO

9The previous section saw increasing active formation of FTAs in recent years
in the world and in East Asia. Policy makers as well as researchers have shown
concerns that FTAs become stumbling blocs to global trade liberalization under the
WTO. This section provides a brief summary of the discussions of the impacts of FTAs
on the WTO6. Let me first discuss positive arguments about FTAs and then turn to thenegative arguments.
Some of the factors behind the proliferation of FTAs, which were discussed in
the previous section, can be considered as positive factors toward global tradeliberalization. They include speedy negotiation and broader coverage of issue areas.
FTAs involving small number of members are likely to be able to conclude
negotiations in a shorter time period compared to the WTO negotiations with 150+
members. Many FTAs have gone beyond the commitments at the WTO (or WTO plus
commitments) by including, for example, liberalization in foreign direct investment,
movement of natural persons, etc. Besides, they include trade and FDI facilitation,
whose progress at the WTO has been slow. FTAs may contribute to trade liberalization
at greater scale compared to the WTO liberalization. Under FTAs import tariffs are to
be removed either immediately or within a certain time frame, while under the WTO
negotiation gradual tariff reduction is pursued. FTAs may contribute to WTO
negotiations as FTAs reduce the influential power of the opposition group against tradeliberalization. Finally, the domino effect of FTAs, which was discussed to havecontributed to the proliferation of FTAs in the previous section may eventually lead to
global trade liberalization by consolidating FTAs into global trade liberalization.
Somewhat from a different perspective and somewhat contradictorily, one may argue
that proliferation of FTAs may lead to global trade liberalization as disintegration of

6See, for example, Ravenhill (2006) for the discussions on these issues.

10the global trading system caused by FTAs makes policy makers realize the importanceof open global trading system.
Let us turn to negative aspects of FTAs, which would deter global tradeliberalization. FTAs may divert the attention of bureaucrats, politicians, businesspeople, and general public away from global trade liberalization. For example,
business sector may lose interest in further liberalization, if it obtains tradeliberalization in the sector in the country of its interest with an FTA The domino
effect was argued to contribute possibly to global trade liberalization, but it may
contrarily deter global trade liberalization. The domino effect may lead to proliferationof FTAs with different rules of origin, giving rise to a “spaghetti bowl” effect that leads
to the breaking up of the global trading system into a number of disintegrated
groupings.

IV. Economic Impacts of FTAs
In the previous sections we saw that FTAs are increasing and we foundtheoretically the impacts of FTAs on multilateral negotiations are ambiguous. In thissection we analyze the economic impacts of FTAs on FTA members and non-members.
Such analysis would be useful in formulating FTA and multilateral trade liberalization
policies.

IV.1 Economic Impacts of FTAs
One can classify the economic impacts of FTAs into two groups: static effects
and dynamic effects. 7 Static effects are “trade creation effects,” “trade diversion

7

The analysis here is intended to give concise explanation of the major points and therefore lacks
theoretical rigor. For a detailed analysis of the economic impacts of RTAs, that is customs unions
and FTAs, see, for example, Baldwin and Venables (1995).

11effects” and “terms of trade effects,” while the dynamic effects include “market
expansion effects” and “competition promotion effects.”“Trade creation effects” result from the elimination of trade barriers among
FTA members and, therefore, the new trade created among them, resulting in an
improvement in resource allocation. “Trade diversion effects” address the ways that
FTAs replace highly efficient products of non-member countries by imports from lessefficient FTA members. In general and from the viewpoint of FTA members, “tradecreation effects” have positive impacts while the impacts of “trade diversion effects”
are ambiguous.
The analysis of trade creation and trade diversion effects above can be applied
to a small country, which does not have any influence on international prices or theterms of trade. As such, the terms of trade effect of FTAs is not considered in the above
analysis. For a large country or a large FTA group consisting of FTA member countries,
the formation of an FTA enables a large country or a large FTA group to gain as it
improves its terms of trade by expanding trade between FTA members at the expenseof its trade with non-members.
Beyond the economic impacts of FTAs on their members, it is important torecognize that the static impacts of FTAs on non-FTA members are negative. Non-FTA
members suffer from welfare loss because trade diversion effects reduce the level of
their exports to FTA members and because the terms of trade effect would reduce
non-members’ welfare as the terms of trade for non-FTA members deteriorate. Indeed,
as was discussed above, the emergence of negative impacts of FTAs for non-FTA
members leads to FTAs, resulting in the proliferation of free trade agreements, as
non-FTA members try to cope with the negative impacts by creating new FTAs or
joining existing FTAs.

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As for the dynamic effects of FTAs, both market expansion effects andcompetition promotion effects contribute to economic growth of FTA members.
“Market expansion effects” involves expanded market size needed to achieve efficient
production/distribution and economies of scale. “Competition promotion effects” result
from market integration in ways that would make regionally oligopolistic industries
more competitive thus achieving higher productivity through the introduction ofcompetitive pressures. For non-FTA members these effects are likely to have positive
impacts as economic growth of FTA members tends to promote the exports ofnon-members to the members.
The theoretical analysis of the impacts of an FTA on FTA members andnon-members is shown to be ambiguous, that is could be positive or negative. Having
noted this ambiguity, if negative impacts would arise, it would be non-members thatare likely to suffer from negative impacts, as they are discriminated against. In light ofthese observations the next section reviews empirical studies that examine the impactsof FTAs on members as well as non-members.

IV.2 Empirical Analysis of Welfare and Trade Impacts of FTAs
Two types of empirical research have been conducted to examine the impactsof FTAs on members and non-members. One is a simulation analysis using computable
general equilibrium (CGE) models, and the other is to use econometric analysis. The
former is characterized as ex-ante analysis, while the latter as ex-post analysis. Eachapproach has its strengths and weaknesses.
A CGE model is constructed to mimic the actual working of the economic
system by specifying activities of economic agents such as producers, consumers andgovernments. A typical CGE model covers the world consisting of a number of13

countries and a number of sectors. The most popular CGE model used for the analysis
of FTAs is the GTAP (Global Trade Analysis Project) model. The strength of the CGE
model is its theoretical consistency and comprehensive coverage in that it captures all
economic impacts through the market mechanism including inter-industry andinter-country impacts of policy changes such as FTAs. At the same time, there areseveral weaknesses. One is the difficulty in constructing a model that reflects the actual
economic system. For example, a typical CGE model assumes perfect competition.
Although the perfect competition assumption may not be appropriate in many cases, alack of knowledge on the type of actual competition forces researchers to make theperfect competition assumption. Another problem is the difficulty in obtaining
appropriate data and parameters used for the model. Indeed, the more detailed andrealistic the model becomes, the more difficult it is to obtain the appropriate data. The
third problem is that the results of CGE model cannot be tested statistically, in order toevaluate the validity of the results.
A number of simulation exercises have been conducted to investigate thepossible impacts of FTAs by using CGE models.8 Indeed, it has become customary to
conduct a CGE model simulation when policy makers formulate FTA policies. The
results of CGE studies show two common trends. First, FTA members are shown togain in terms of economic welfare and GDP, while non-FTA members generally lose.
These findings are consistent with the theoretical predictions. For example, Scollay
and Gilbert (2001) obtain the following results from their analysis of an FTA
comprised of ASEAN, China, Japan, Korea, Australia, and New Zealand. All themembers gain in terms of economic welfare, while non-members such as the US, theEU and Taiwan lose. The world as a whole is shown to gain. Similar patterns of gains

8

See Ando and Urata (2007) for a survey of the CGE studies on East Asian countries.
14and losses are found by Ando and Urata (2007), who examine the static as well as
dynamic impacts of FTAs involving East Asian countries using the GTAP model.
Another general trend observed from the results of CGE simulation studies
has to do with the number of FTA members or the country coverage. Generally, it isobserved that the greater the number of FTA members, the larger the gain from an FTA.
This can be seen by comparing the results of FTAs with different country coverageusing the same model. Scollay and Gilbert (2001) find that the welfare gains for theworld as well as FTA members tend to increase through wider coverage of countries
under liberalization as the coverage of FTAs change from a group consisting of
ASEAN, China, Japan, Korea, Australia, and New Zealand to a group of economies
belonging to APEC and then to the all the countries in the world. A similar pattern wasobserved by Ando and Urata (2007). These observations are consistent with thetheoretical analyses in that the scope for trade creation increases and the scope fortrade diversion declines with the number of FTA members.
An econometric analyses of the impacts of FTAs typically examines theimpacts of FTAs on foreign trade. Specifically, the gravity model, which is constructedon the assumption that the magnitude of bilateral trade depends on the economic sizeof the two countries and the distance between them, is estimated to examine the tradecreation and diversion effects of FTAs. One weakness of the econometric approach in
the FTA analysis is its inability to incorporate simultaneous changes in a number ofpolicy variables. For example, econometric analysis finds it difficult to deal withsimultaneous removal of tariffs in many sectors from many countries, as they result in
a complicated interplay of the effects. Another problem is the difficulty in dealing witha large change such as the removal of tariffs under FTAs, which tends to have15

substantial impacts not only on trade but also on other economic activities such as
production and employment, which in turn would affect trade.
Similar to the case of CGE model studies, a number of gravity model
estimations have been conducted to examine the impacts of FTAs on foreign trade.
Many studies found that FTAs promoted intra-FTA trade, indicating the presence of the
trade creation effects. For example, Frankel (1997) conducted a gravity model
estimation covering 63 countries in the 1965-94 period with a variety of different
model specifications. He finds that intra-regional trade in Western Europe, East Asia,
APEC, and the Western Hemisphere is significantly higher than the predicted values. A
recent study by Baier and Bergstrand (2007) reports very significant trade creation
effects as they find that an FTA approximately doubles two members’ bilateral trade
after 10 years.
Relatively few studies examined the presence or absence of the trade
diversion effect. Urata and Okabe (2007) analyze the impacts of selected FTAs on
trade by explicitly considering trade between FTA members as well as trade between
FTA members and non-members. Their results indicate the presence of trade creation
effects for most FTAs they study. Specifically, out of 11 FTAs they examine, only three
FTAs, ASEAN-China, Singapore-Japan, and Singapore-US, were found to have nosignificant trade creation effect. As to the trade diversion effect, five out of 11 FTAs
were shown to have significant trade diversion effects. These findings indicate that
FTAs tend to promote trade between and among FTA members, implying that FTAs arewelfare enhancing for FTA members, while FTAs may divert trade away from
non-members, reducing welfare of non-members.

V. Multilateralizing FTAs

16

In terms of economic welfare it is global or multilateral trade liberalization
under the WTO that is optimum and thus regionalism or FTAs are at best the second
best policy. Despite their second best nature, FTAs are not going to go away.
Recognizing this observation, what we need to do is to formulate the ways how FTAs
may be turned into global trade liberalization.
At least two approaches can be considered, one is to consolidate FTAs toestablish an FTA with a greater number of FTA members. One such example isconsolidation of Japan’s bilateral FTAs with individual ASEAN members to create aJapan-ASEAN FTA. In this case Japan plays a pivotal role. If the contents of Japan’sbilateral FTAs with individual ASEAN members are similar, the consolidation is notthat difficult. However, consolidation is very difficult if the contents of FTAs aredifferent and the number of FTAs involved in the consolidation is large. In the case of
establishing a Japan-ASEAN FTA, tremendous resources appeared to have been used
for the negotiation. Indeed, it looked as if the members had to set up a new FTA, as thecontents of individual FTAs were quite different.
Another approach is to enlarge an FTA by accepting a new member or a groupof members. This approach may be characterized as merging or docking. An example
is the EU enlargement. This accession process may require less resources and timecompared to consolidation because it is only the new member that requires adjustment.
In Asia-Pacific, P4 or Trans-Pacific Strategic Economic Partnership Agreement (TPP),
which include Brunei, Chile, Singapore and New Zealand, may be able to play apivotal role. Indeed, at present Australia, Peru, the US, and Vietnam have shown
interest in joining TPP.
A core FTA, with which new members will be merged or docked, has to haveseveral important features. The core FTA has to be of high level in terms of trade17liberalization, in order to contribute to achieving free and open global trading
environment. The rules such as those on the rules of origin should be simple andtransparent, so that the implementation and usage of the core FTA as well as merging
or docking with the core FTA can be done smoothly. In order to facilitate an accession
by new members, the conditions for accession should be clearly defined and indicated.
Having discussed the possible ways of turning FTAs into global tradeliberalization, it is going to take time. In the meantime, many developing countries,
especially those in Sub-Sahara Africa are likely to be excluded from the FTAs
involving major countries. To deal with the problems arisen from discrimination, these
low-income countries should be given an market access to the developed and emerging
developing countries through preferential schemes such as the Generalized System ofPreferences.
Finally, it should be emphasized that global trade liberalization has to bepromoted in order to reduce discriminatory effects of FTAs.

VI. Concluding Remarks
The ongoing global financial and economic crisis revealed both the strength
and weakness of the global trading system under the World Trade Organization (WTO).
The presence of the WTO prevented the crisis-ridden countries from adopting highly
protectionist policies like those adopted during the Great Depression years, thereby
contributing to relatively speedy recovery. Having noted the strength of the WTO, theWTO could not stop the countries from adopting protectionist measures, which were
not outright violation of the WTO rules but did have trade distorting impacts. Many ofthese protectionist measures could have been avoided if the WTO had been successfulin strengthening and improving its rules and their implementation. Once economic

18

recovery is more or less achieved, these protectionist measures may be rolled back. If
not, litigation on these measures is likely to be initiated at the WTO, and then they will
be phased out.
One important “protectionist” measure, which is likely to stay or evenincrease after the recovery, is regional preferential trade agreements such as free trade
agreements (FTAs). FTAs started to increase rapidly before the crisis, but the pace of
the increase appears to have accelerated because of the crisis. The trend is likely tocontinue if the DDA does not get restarted. Some observers argue that proliferation of
FTAs undermines the global trade system under the WTO, while some others argue
that the stalemate of the WTO’s Doha Round negotiations is a contributing factor to
the proliferation of FTAs. Knowing that FTAs is not the best policy but at the sametime that they are likely to stay with us for sometime to come, I argued in this paperthat FTAs should be merged/docked to the core FTA. Once a core FTA is set up and thecountries begin to join the core FTA, many countries would follow to join the core FTA
in order to avoid negative impacts from discrimination. In Europe, the EU is a core
FTA as it increased its members remarkably over time. In the Asia-Pacific region the
TPP may play that role.
In order to facilitate merger of FTAs with a core FTA, a core FTA has to havehigh-level in terms of trade liberalization and simple and transparent rules. G-20
countries may become core members in a core FTA. Having discussed the possible
contribution of the enlargement of a core FTA toward multilateral trade liberalization,
efforts have to be made to promote multilateral trade liberalization. In this regard, G-20
may make contributions by setting up G-20 trade ministers’ meetings to discuss tradeissues.

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References

Aggarwal, Vinod K. and Shujiro Urarta eds. (2006) Bilateral Trade Agreements:
Origins, evolution, and implications, Routledge, New York.

Ando, Mitsuyo and Shujiro Urata (2007) “The Impacts of East Asia FTA: A CGE
Model Simulation Study” Journal of International Economic Studies, vol.11, No. 2,
December, pp. 3-75.

Baier, Scott L. and Jeffrey H. Bergstrand (2007) “Do Free Trade Agreements Actually
Increase Members’ International Trade?” Journal of International Economics 71, pp.
72-65.

Baldwin, Richard e. and Anthony J. Venables (1995) “Regional Economic Integration,”in Gene M. Grossman and Kenneth Rogoff eds. Handbook of International Economics
3, Elsevier

Frankel, Jeffrey A. (1997) Regional Trading Blocs in the World Trading System,
Institute for International Economics, Washington, D.C.

Ravenhill, John (2006) “The Political Economy of the New Asia-Pacific Bilateralism:
Benign, Banal, or Simply Bad?” in Vinod K. Aggarwal and Shujiro Urata eds.
Bilateral Trade Agreements in the Asia-Pacific: Origins, Evolution, and Implications,
Routledge, New York.

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Sally, Razeen (2006) “Free Trade Agreements and the Prospects of Regional
Integration in East Asia,” Asian Economic Policy Review, volume. 1, issue 2,
December, pp. 306-321.

Scollay, Robert and John P. Gilbert (2001) New Regional Trading Arrangements in the
Asia Pacific? Institute for International Economics, Washington, D.C.

Urata, Shujiro (2005) “Free Trade Agreements: A Catalyst for Japan’s Economic
Revitalization,” in Takatoshi Ito, Hugh Patrick, and David E. Weinstein, eds., Reviving
Japan's Economy, MIT Press, Boston, pp.377-410.

Urata, Shujiro and Misa Okabe (2007) “The Impacts of Free Trade Agreements on
Trade Flows: An Application of the Gravity Model Approach, RIETI Discussion Paper
Series 07-E -052

World Bank (1993) The East Asian Miracle: Economic Growth and Public Policy,
Oxford University Press for the World Bank

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Figure 1

FTAs in the World

Table 1 Major FTAs Involving East Asian Economies (as of August 2009)
In effect
In negotiation
Bangkok Treaty(1976)
Singapore-India(2005) Japan-Korea
China-Singapore
AFTA(1992)
China-Chile (2006)
Japan-GCC
Malaysia-Australia
Singapore-NZ (2001)
Korea-Singapore(2006) Japan-Vietnam
Malaysia-NZ
Japan-Singapore (2002) Japan-Malaysia(2006) Japan-India
Malaysia-Pakistan
Japan-Australia
Malaysia-US
Singapore-Australia (2003 Korea-EFTA(2006)
Singapore-EFTA (2003) Korea-ASEAN(2006） Korea-US*
Singapore-Canada
Singapore-US (2004)
Singapore-Panama(2006 Korea-Canada
Singapore-Mexico
Korea-Chile (2004)
Japan-Chile (2007)
Korea-India
Singapore-Egypt
China-Hong Kong (2004) Japan-Thailand (2007) Korea-Mexico
Sigapore-Qatar
China-Macao(2004)
China-Pakistan (2007) Korea-EU
Singapore-Peru
Singapore-Jordan(2004) Japan-Philippines(2008) China-Australia
Thailand-EFTA
Japan-Mexico (2005)
Japan-ASEAN(2008) China-NZ
Thailand-India*
China-ASEAN(2005)
Japan-Indonesia(2008) China-GCC
Thailand-US
Thailand-Australia(2005) Japan-Brunei(2008)
China-Pakistan
ASEAN-CER*
Thailand-NZ(2005)
China-SACUFTAASEAN-India*
Notes: * indicates that treaty has been signed and waiting for the ratification by thelegistative bodies.
Source: WTO website and respective government sources.

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GIARI Working Paper Vol. 2009-E-8,
January 2010
Published by Waseda University Global COE Program
Global Institute for Asian Regional Integration (GIARI),
Waseda University, Nishiwaseda Bldg. 5F#507 1-21-1
Nishi-waseda, Shinjuku-ku, Tokyo 169-0051 Japan
E-mail: affairs@waseda-giari.jp
Webpage: http://www.waseda-giari.jp
Printed in Japan by TRY-EX Inc.

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