2008-E-4
Competitive Regionalism
Explaining the Diffusion and Implications of FTAs in Asia PacificMireya Solis1 and Saori N. Katada2
June, 2008

This paper presented at the International Symposium “Competitive Regionalism,” Ibuka
International Conference Hall, Waseda University, Tokyo, Japan, May 30 to 31, 2008.

1

Associate Professor at the School of International Service of American University
Associate Professor at School of International Relations, University of Southern
California
26/17/2008
Competitive Regionalism:
Explaining the Diffusion and Implications of FTAs in Asia PacificMireya Solís and Saori N. Katada

Introduction
In the past fifteen years, the world trading system has experienced a majortransformation with the rapid proliferation of free trade agreements (FTAs) 1 whereby
members establish special exemptions to the most favored nation principle of the WTO
and exchange preferential market access commitments. The increase in FTAs has indeed
been phenomenal: from 25 such agreements reported to the WTO in the late 1980s to
more than 200 by the 2000s. This rapid proliferation has, hence, been described as the“rise of regionalism” (as FTA members agree to deeper economic integration) and has
raised concerns as to how these arrangements might undermine the multilateral trading
system. We argue in this book, however, that this conventional wisdom yields only apartial understanding of the drivers of the FTA frenzy and its most importantconsequences. We posit that in order to understand the rapid expansion of FTAs, it isessential to factor in how these different sets of preferential trade agreements areinterconnected (either because they generate externalities on non-members or because
they disseminate novel policy paradigms). Next, we argue that understanding the causesof the FTA frenzy is essential not only because of its impact on the WTO, but also
because of its influence on the nature of regional integration- remarkably enough, a very
important topic that has remained under the radar. FTAs can work for or against the
emergence of coherent regional blocs and we must explore which conditions favor one
outcome over the other.
In order to analyze the FTA explosion, then, it is essential to explore diffusion
dynamics arising from the interconnectedness of preferential trade negotiations, including
but going beyond, traditional economic considerations. For these purposes, we anchor ouranalysis of FTA proliferation in diffusion models which have already demonstrated their
1

Although FTA is the most widely used term, these trade agreements represent the exchange of
trade/investment preferences to selected members and PTA (preferential trade agreements) may be a moreaccurate acronym. We have decided to use FTA, however, given that it is the more familiar term.

usefulness in explaining the spread of economic and political liberalism (Elkins andSimmons, 2005, Simmons et al. 2006). We argue that the waves of regionalism in theworld economy approximate well the condition of “uncoordinated interdependence,” asdeveloped by diffusion theorists. In other words, the policy choices of governments are
influenced by the actions of their peers, either because they alter the material payoffs or
because they disseminate new information about the impact of these policies (Elkins andSimmons, 2005). In the process of analyzing FTA proliferation, we focus on two of themost powerful diffusion mechanisms, emulation and competition, to explore the extent towhich policy paradigms propagated by like-minded elites or competitive goals articulated
by business and government officials have contributed to the dissemination of FTAs.
Furthermore, we do offer a much broader conceptualization of competition than the one
articulated by the diffusion literature as we take into account not only economic rivalry,
but also competitive pressures arising from security and legal objectives as fuelinginterest in FTA negotiations.
The extent to which the competitive hypothesis is confirmed over the emulation
hypothesis in the country case chapters has significant implications for a bedrock
expectation in the FTA literature: that these preferential trade agreements promote
regional integration.2 Instead, if the competitive incentives behind FTA proliferation
predominate, these preferential trade agreements may weaken the emergence of coherent
trade blocs in different ways: through preference erosion of earlier FTAs; by diluting
regional solidarity as individual members of existing trade groupings negotiate separate
trade deals with larger nations;3 and by encouraging cross-regionalism or thedevelopment of competing FTA networks within the same region. An FTA competition
that erodes, rather than strengthens, the emergence of a regionally coherent trade area is a
powerful proposition assessed by this book.4
In sum, this collective volume investigates central questions regarding the natureof the international trading system and the future of regional integration: What is driving
2

Indeed, they are typically characterized as the first step in the path towards regional integration that will
later on include creation of a customs union, common market and monetary union (Balassa, 1961).
3
The numerous instances of individual ASEAN nations negotiating separate bilateral FTAs are illustrative
examples.
4
Our thinking on this issue was greatly influenced by the comments of Richard Stubbs and T.J. Pempel at a2007 ISA panel.

2the worldwide explosion of FTAs? Why is it more likely for states to establish a newbilateral FTA than to join in existing ones?5 Can FTA networks represent the foundation
for much more ambitious projects of regional integration and collaboration? We examine
these important questions through a novel analytical approach that highlights the sourcesof policy diffusion.
The FTA strategies of important trading nations located at both sides of the
Pacific Rim offer an ideal venue to test these arguments. Western Hemisphere countries,
such as the United States, Mexico and Chile have been at the forefront of the FTA wave
as they have already negotiated multiple preferential deals at the bilateral and subregional
level, while a region-wide FTA has remained an elusive goal. Moreover, these active
preferential traders have also signed FTAs with East Asian counterparts which only
recently launched an FTA track in their trade strategies. In fact, as the APEC (Asia
Pacific Economic Cooperation) project, which sought to voluntarily liberalize trade
among the Pacific Rim member countries, lost steam in the late 1990s, these crossregional FTAs have acquired a much more central role in structuring trans-Pacificeconomic relations. The policy shift is especially remarkable for East Asian countries
such as Japan, Korea, China, and ASEAN, who are now putting aside their previous
reluctance towards formal integration, are rapidly signing FTAs (both regionally andcross-regionally) that award preferential market access, impose binding commitments,and embrace some WTO-plus commitments.
In view of these developments, we argue that it is important to assess the extent towhich the FTA policies of Pacific Rim countries are influenced by the externalities
generated by prior actions of their peers; whether FTA diffusion in both the Western
Hemisphere and East Asia approximates better the expectations of ideational emulation
or economic competition; and within competitive dynamics, the extent to whichgovernments’ FTA policy is affected by the need to respond to multiple competitive

5

Mattli (1999: 61-64) for instance argues that governments have two choices when confronted with losses
due to FTA externalities: to join existing trading blocs (first integrative response) or to form new andseparate ones (second integrative response). In his view, the reason why a government is forced to opt forthe more costly option of creating a new group is due to high membership costs or rejection by the original
group. Our project adds to such logic and investigates the possibility that the excluded government mightchoose to create its own group due to various competitive pressures.

3

pressures (economic, security, or legal) that may or may not be compatible at different
points in time.
This framework chapter is organized in the following ways. First, we review thegeneral literature on FTA negotiation and the more specialized scholarship on the policy
shift in favor of preferential trading in the Pacific Rim in order to highlight thecontribution that our focus on the diffusion dynamics of FTA proliferation can make tothe field. Second, we offer an empirical overview of the rapid spread of FTAs with anemphasis on the following dimensions: the temporal clustering of FTAs, the actual
volume of trade covered under these preferential trade agreements, and the proliferationof North-South and South-South FTAs. Third, we develop a model of FTA diffusion that
contemplates two alternative hypotheses –emulation and competition- and discuss theoperationalization of the relevant variables that guide the process tracing methodology
employed in the country chapters. Fourth, we discuss the implications of endorsing a
multidimensional concept of competition that factors in economic, security, and legalpressures that trigger preferential trade talks. The final section presents a synopsis of theindividual chapters in this volume on competitive regionalism, and discusses the value
added of explaining FTA proliferation through the diffusion model developed here.

1. Literature Review:
Towards an understanding of FTA triggers and proliferation
So what then motivate governments to negotiate preferential trade agreements?
How has the traditional literature on regionalism explained the growth of FTAs? And
what are the most influential views regarding the very visible policy shift among Pacific
Rim nations in favor of preferential trade accords? These are some of the questions that
this section will explore.

Traditional explanations of FTA negotiation and proliferation
The study of regional integration has a long pedigree. Three schools of thought inparticular have largely influenced our understanding of the central driving forces ofpreferential trading, and in some instances they also reflect upon the likely factors behind
FTA proliferation.

4

Economic Interdependence
The first such school of thought –neofunctionalism- focuses on economic
interdependence and argues that trade concentration is the most important spark forregional integration. According to this view, governments will initially agree to poolsovereignty in order to manage the technical issues created by expanding economictransactions. But integration will quickly acquire a life of its own due to the dynamics offunctional spillover, i.e., integration in one sector will increase pressure to integrate otherrelated industries. Supranational and subnational actors are, therefore, the main enginesof the integration locomotive (Haas, 1964). In a more recent formulation, Mattli (1999)
uses neofunctionalist logic to explain the demand side of regional integration. In his
view, as flows of intra-regional trade and investment increase, the private actors will callfor the creation of supranational institutions that allow them both to reduce theuncertainty and transaction costs surrounding these cross-border economic transactions,and to reap the benefits of economies of scale.
While neofunctionalism identifies a powerful force for regional integration(private sector demand for an integrated trade governance structure to maximize
economic opportunities), it has in fact serious difficulties in explaining the timing ofregional integration initiatives or the more specific choices countries are making inselecting their trading partners. For starters, economic interdependence is a poor indicatorof shifts in favor of regionalism. For instance, intra-regional trade has consistently been
higher for East Asia than for North America (as of 2003, 54% in East Asia and 46% inNorth America), and yet the United States, Canada, and Mexico moved much faster tonegotiate a regional trade agreement (NAFTA) than the nations of East Asia.6 Moreover,contradicting the expectations of neofunctionalism, industrialized nations are currently
selecting mostly minor economic partners for FTA negotiations that are expected togenerate modest aggregate economic gains (Pekkanen, Solís, Katada, 2007). In the caseof East Asia, the absence of a bilateral Sino-Japanese FTA initiative despite extensive

6

Figures are from Kawai 2005, 31-32.

5

trade and investment links illustrates how political obstacles and strategic considerations
weigh heavily on the decision whether or not to seek preferential trading ties.

Domestic lobbying and rent-seeking
The role of domestic lobbies in pushing for trade diverting agreements that yieldrents for specific producer groups constitutes another line of analysis. In this regard,
Grossman and Helpman (1995: 680, 687) have led the way in developing formal models
to explain when FTAs will be politically viable, and what the likely characteristics are ofthese preferential trading agreements after clearing the political market. These authors
deem possible the successful negotiation of an FTA only under three scenarios: a) the
benefits from trade creation win the support of consumer groups while import competing
industries fail to coordinate their opposition to the accord, b) gains to exporters far
surpass losses of disadvantaged industries, or c) liberalization exemptions are carved toprotect sensitive sectors. These authors consider the latter two options far more likely
since protection for most sectors is the political recipe to muster domestic support forminilateral trade agreements. On the one hand, exporters protected by stiff rules of origin
and hefty external tariffs will endorse an agreement that guarantees them access to higher
priced regional markets. On the other, import competing industries will not mount an
opposition campaign if they are “bought out” with promises of sectoral protection.
Baldwin’s (1997) powerful model of the “domino effect” describes how thenegotiation of trade diverting trade agreements will trigger a chain reaction of subsequentFTA enlargement or negotiation of alternative trade blocs as disadvantaged non-member
producers will seek to minimize the trade and investment diversion resulting from theoriginal regional preferences. Baldwin makes the persuasive point that producer groups
will lobby harder for FTA membership than to rescue troubled multilateral talks, since
failure at the multilateral level results in a missed opportunity for everyone; whereas
uncorrected regional discrimination weighs heavily on non-member producers (Baldwin,
1997: 879).
Models of domestic lobbying for (and to counter) trade diverting FTAs offer a
powerful account of the importance of sectoral rent seeking in the search for preferential
market access. However, the trade diversion motive can only explain a subset of such

6

FTAs, and is quite clearly irrelevant in other instances. For example, Japan’s first everpreferential trade agreement with Singapore (in force since 2002) was not informed by
the desire to counter trade diversion since Singapore is already one of the most open
economies in the world. More generally, domestic lobby arguments are hard pressed to
explain the construction of regional institutions to satisfy proactive state agendas at thepolitical level, such as to ameliorate regional tensions, favor allies, partake in trade andinvestment rule-making, and fend off against domestic lobby groups through the familiar“tying of hands” in international agreements.

State autonomy
A third model of regionalism –intergovernmentalism- focuses less on economic
gains or private lobbies, and more on the autonomous objectives of states in embarking
on official trade negotiations. In this view, states consent to pool sovereignty via regional
integration to achieve joint gains that could not be realized with purely national measures,or to gain leverage over domestic interest groups (Moravcsik, 1993). Alliance andsecurity concerns are also a part of the state calculation in engaging in more intense traderelations (Gowa, 1984). Dominated by the state agenda, regional integration proceeds asa series of ‘celebrated bargains’ between heads of state. Preference convergence between
political leaders is therefore an important precondition for regional integration to makestrides. Power asymmetries are important in that the largest states in the bloc dominate
negotiations. Policies adopted represent the lowest common denominator, i.e., theminimalist position on integration by one of the largest members. Small states will be
persuaded to support the integration package through side payments; whereas recalcitrant
larger states will be brought in through the fear of exclusion. Finally, states will do theirutmost effort to preserve sovereignty. States will grant any loss of discretionary power
only after carefully weighing in the benefits of integration, and they will consistently
adopt safeguards (consensus voting rules for instance) to make sure national interests are
not overridden by regional institutions (Moravcsik, 1991).
Intergovernmentalism has not been without its critics. Mattli (1999: 29) for
instance, points to the shortcomings of depicting regionalism as a series of discreet
summitry events. Intergovernmentalism’s narrow focus, therefore, leaves out on-going7

processes (market exchange) affecting the prospects of regional integration, assumes
away problems of implementation of high-level official bargains, and leaves unexplained
the reasons behind the convergence of regional integration preferences among key
members. In our own view, it is not necessary to circumscribe the intergovernmentalism
hypothesis to a series of high-profile deals between heads of state. Autonomous state
preferences can have a powerful impact on the path of preferential trade negotiations inmany other ways. In addition to head of state summitry, state preferences moldintegration efforts through inter-bureaucratic politics. Indeed, FTA negotiations canbecome important matches for competing bureaucracies that seek control over the foreign
economic policy agenda either to push for a specific policy orientation, or to gain
bureaucratic turf and protect special client groups.7
Similarly, state goals to be achieved through preferential trading negotiations are
not limited to the supply of an integrated governance structure to lower risk andtransaction costs (although an important goal in its own right); but can include othereconomic and security diplomatic goals. Economic integration negotiations can serve as aconfidence building measure that ameliorates the security dilemma among nation-states.
States may embark on FTA diplomacy in order to bid for regional leadership througheconomic cooperative endeavors. Preferential trading blocs can also help statesaccomplish their foreign policy objectives in other forums, such as pushing for new rules
on trade and investment that can later on be incorporated at the multilateral level (WTO)(World Bank, 2000).
As this brief overview has shown, theories of regional integration have yielded anumber of propositions regarding the incentives to negotiate FTAs. From neofunctionalism, we should expect high levels of economic interdependence to energize theprivate sector in demanding a regional economic governance structure that reducestransaction costs. From domestic lobbying models, we should expect industries to lobby
for FTAs that offer rents through preferential market access or that aim to dissipate theserents by negotiating countervailing FTAs. And from intergovernmentalism, we should
anticipate governments to be firmly in control of the integration agenda and to use these7

For an example of inter-bureaucratic politics affecting foreign economic policy (Japan’s regime on capital
flows) see Solís (2005).

8

agreements to gain leverage over domestic interest groups. Within the regionalism
literature, we believe that Baldwin’s domino effect has addressed most directly and withgreatest success the issue of FTA proliferation by highlighting how trade and investment
diversion effects from initial FTAs can generate a chain reaction of subsequent
preferential trade agreements. Yet, we believe that diffusion models can shed new lighton the dissemination of FTAs in at least three important ways. First, we can factor in theinterplay of multiple competitive objectives in FTA negotiation that go beyond thedefensive economic interests of the domino theory, and include regional leadershipcontests and dissemination of alternative standards in regional integration. Second, ourproject posits an alternative hypothesis on FTA proliferation that focuses on the role ofideas or policy paradigms as countries emulate successful FTA strategies of leadingreference nations. In this way, our study entertains an alternative explanation for FTA
diffusion with markedly different expectation on the nature of regional integration. And
third, this project looks more directly into how domestic policy formulation processes
influence the manner in which governments respond to external diffusion pressures.
Next, we discuss the budding literature on FTAs and regionalism in the Pacific
Rim area, with a particular emphasis on East Asia, to highlight the promise of diffusion
models in explaining the on-going FTA rush.

Current understanding of FTA proliferation in the Pacific Rim
First movers: FTA strategies of Western Hemisphere nations
Although Latin American countries had one of the longest histories of regional
integration efforts in the world dating back the time of Simón Bolívar (in the earlynineteenth century),8 this “old regionalism” for the most part did not produce substantive
integration. The predominant developmental model in the region during the 1960s and1970s–import substitution industrialization- implied that the goal of creating apreferential regional market would be achieved by maintaining external protective
barriers, restricting foreign direct investment, allowing extensive national industrial
8

See Barbara Stallings (2008) for a brief history of regional integration endeavors in Latin America. The
most notable initiatives were the Central American Common Market (1960), the Latin American Free
Trade Area (1961, transformed in 1980 into the Latin American Integration Association or ALADI), and
the Andean Group (1969).

9

planning, and exempting multiple sectors from liberalization (Devlin and Giordan, 2004).
The staunch US support for the multilateral liberal economic system, and its suspicion of“parochial and local regionalism” further limited the chances of far-reaching hemisphericintegration (Feinberg, 2002: 127).
In the second half of the 1980s and early 1990s, a window of opportunity opened
for the emergence of the “new regionalism” in the Western Hemisphere. The 1989
Canada-US FTA –spurred by Canadian concerns over U.S. protectionism- was the firststep (Baldwin, 1997). But it was Mexico’s subsequent request in 1990 to negotiate a free
trade agreement with the United States (which became the trilateral NAFTA) that marked
the turning point in the spread southward of the new type of FTA: a North-South trade
agreement that endorses a hard law approach to the preferential liberalization of goods,
services, and capital flows. Mexico’s initiative reflected a much broader shift among
Latin American countries. Most of them underwent neoliberal policy reforms and tradeliberalization as a result of the 1980s debt crisis, and they have made promotion ofexports and FDI inflows major policy priorities towards economic recovery and growth.
The broad desire to create more outward looking economic integrationagreements was noticeable in the 1991 formation of the four country (Brazil, Argentina,
Paraguay and Uruguay) regional bloc in the South Cone. The resultant Mercosur(Mercado Común del Sur) endorsed the notion of open regionalism, projected thecreation of a customs union with a common external tariff, and attempted intra-regionaltariff liberalization and FDI promotion. Moreover, spurred by the desire to replicate
Mexico’s preferential access to the U.S. market, Chile began to explore NAFTA
membership and launched a very active FTA strategy (as Mexico did) in order todiversify its market access. The most ambitious project for region-wide integration, theFree Trade Area of the Americas (FTAA) launched in the 1994 Miami summit, wasmostly due to the desire among Latin American countries to pursue integration with theUnited States to secure market access and FDI inflows, lock in macroeconomic reforms
and consolidate democratic rule (Feinberg, 2002).
At the turn of the century, the prospects for sub-regional and regional integration
began to falter, however. The 1999 Brazilian devaluation and the 2001 financial
turbulence in Argentina triggered bitter competition among Brazil and Argentina, as both10

reverted to protectionist measures. Mercosur also began to exhibit other fundamental
weaknesses such lack of institutionalization and meager macroeconomic coordination(Preusse, 2004: 131). The FTAA negotiations did not make the 2005 deadline and are
currently in limbo. Oliveira (2007: 125) argues that the fundamental reason for thisbreakdown in the negotiation process is that Latin American countries are not willing toforego their development status (as Mexico did in NAFTA), and want the concession
package to reflect the huge North-South asymmetries in the region. Brazil, in particular,
has been suspicious of the US willingness to open its agricultural markets and impose
stricter disciplines on antidumping , while it considers that the new trade agenda items
such as intellectual property protection could hinder its development strategy(Zabludovsky and Gómez Lora, 2007: 101).
But the 2001 shift in US trade policy in favor of “competitive liberalization”9 (thenegotiation of bilateral FTAs with ‘can-do’ nations in order to stimulate negotiations inother trade fronts) also drastically decreased the incentives for Latin American countries
to pursue the FTAA. As explained by Zabludosky and Gómez Lora (2007: 99), instead of
perceiving the FTAA as the only way to secure preferential access to the US, many ofthem opted for the faster bilateral route. With competitive liberalization, FTAs has
become a cornerstone of US trade strategy and not a mere ad hoc deviation frommultilateralism. Consequently, in a five year period the Bush administration launched 16
FTA initiatives (in addition to enacting the FTAs with Singapore and Chile initiated in
the previous Clinton administration). The active FTA policies of the United States,
Mexico, and Chile have generated a veritable boom of preferential trade agreements in
the region, and more recently these Western Hemisphere countries have set their sights inEast Asia, the most recent theater for the dramatic proliferation of preferential trade
agreements.

The latest bandwagon: East Asia joins the FTA frenzy

9

The competitive liberalization strategy reflected the concern with falling behind in the FTA race given the
difficulties in obtaining fast track authority after NAFTA; the desire to obtain market access concessions
from countries competing for preferential treatment in the US market; and the attempt to maximize
leverage by pursuing concurrent trade negotiations bilaterally, regionally and multilaterally Evenett andMeier (2008).

11

Not so long ago, champions of multilateralism (Panagariya, 1999, Bhagwati,1993), who worried about the deleterious effects of regional trading blocs on the
GATT/WTO system, could take comfort in the fact that one of the world’s fastest
growing regions remained immune to the spread of preferential trading. East Asia, prior
to the 1997 financial crisis, was commonly praised as a highly performing region wherewebs of trade and investment had been established not through formal inter-governmental
agreements, but rather through the private sector, and more specifically, through Japanesemultinational corporations or by business networks of overseas Chinese (Peng 2002,
Ravenhill, 1995, Hatch and Yamamura, 1996). Even the region’s most ambitious projectof trade liberalization –the Asia Pacific Economic Cooperation or APEC- seemed toconfirm this regional distaste for formal and preferential integration. Japan in particularconsistently resisted U.S. attempts to turn APEC into a binding trade-liberalizingorganization. Instead, APEC promised to deliver trade and investment liberalization by
the year 2020 based on voluntarism, non-binding commitments, and most importantly,
non-discrimination (Higgott and Stubbs, 1995).
Since the late 1990s, East Asian countries have negotiated multiple FTAs thataward preferential market access, impose binding commitments, and embrace numerous
WTO-plus commitments. The key issue is why? In answering this question, the growing
literature on East Asian regionalism has focused on three main aspects: the triggers forpolicy change, the drivers of the FTA policy track, and the likely consequences of FTA
proliferation for the construction of broader regional institutions and the multilateral
trading system. Regarding the origins of regional institution building in East Asia,
Pempel (2005: 9-11) argues that the region is ripe for cooperation today due to long-termchanges that include growing economic interdependence in East Asia, China’s
reintegration into the region (by normalizing relations with the United States and Japan,
and focusing on economic reforms), and growing cooperation among ASEAN nations.
The combined result of these trends has been to lower the obstacles to regional
cooperation. On the other hand, other accounts of FTA proliferation in the region focus
on a number of recent external shocks that raised serious concerns about the performanceof international trade institutions –WTO, APEC, AFTA (Aggarwal, 2005, Krauss, 2003a:
317-318, Dent, 2003) and/or challenged the wisdom of exclusively pursuing de facto

12

market integration in a world characterized by growing trade blocs and financial
instability (Aggarwal, 2005, Lincoln, 2004).
A heated debate has also ensued among scholars regarding the essential drivers ofEast Asia’s FTA frenzy. On the one hand, some analysts emphasize the fact that FTA
diplomacy is by no means a repeal of statist policies. Bowles (2002: 259-260), forexample, explains Japan’s recent economic bilateralism as the use of a new mechanism toachieve goals long sought after by a developmental state: promotion of a division of laborin East Asia where Japan plays a key role as supplier of technology and capital, whereintra-regional exports provide new stimulus to economic growth, and where Japanesesubsidiaries in the region capture a sizable portion of the intra-regional trade. Through abroader examination of bilateral FTAs among Asia-Pacific nations, Aggarwal and Koo(2005) reach the conclusion that interest group politics has not been a very powerfuldriver of these initiatives, thereby reinforcing the conclusion that the strong state is at thecenter of these bilateral trade negotiations.
And yet, other scholars (including us) have portrayed interest group lobbying andnon-state actors as powerful agents influencing the actual content of FTAs. For instance,
Katzenstein (2006) argues that the porous region of East Asia is experiencing a process of
hybrid regionalism where new and mostly non-state actors heavily influence this process.
Similarly, Munakata (2006) concludes that East Asian governments have finally started
to engage in FTAs to “catch up with the market.” In the specific case of Japan, theindustrial sector through its umbrella organization –Keidanren- has been pivotal inlaunching an FTA track in Japanese trade policy (Solís 2003, Manger, 2005, Yoshimatsu,
2005); while the agricultural lobby has very skillfully defined the upper ceiling for farm
liberalization (Mulgan, 2005, Solís and Katada, 2007). Ravenhill’s (2005) analysis of theessential features of Asia-Pacific bilateralism reaches similar conclusions in that these
agreements are plagued with sectoral exemptions for sensitive sectors, so much so thatthey might not be compatible with article 24 of the WTO.
Finally, recent scholarship on East Asian regionalism has explored the impact ofbilateral FTAs on broader regional trade initiatives and the multilateral trading system.
As Aggarwal (2005: 20) deftly puts it, it is important to analyze whether these FTAs arenested on broader agreements or whether they overlap by endorsing different principles

13

of trade liberalization. The compatibility of these bilateral trade agreements with existing
trade governance frameworks is the essential issue at stake. Dent (2003) offers an
optimistic account of how crisscrossing bilaterals (what he labels “lattice regionalism”)
will create momentum for broader regional integration: because there is convergence on
the trade liberalization mode (preferential agreements based on specific reciprocity), andbecause there is strong pressure to streamline the “noodle bowl.” Ravenhill (2005),
however, reaches the opposite conclusion in that trade diverting bilateral agreements have
weakened the domestic coalition in favor of liberalization (by creating vested interest thatendorse preferential export access and protection of weak sectors), thereby undermining
as well the momentum for multilateral liberalization. On the other hand, Aggarwal andKoo (2005: 296) believe that a combination of a weak WTO and APEC, as well as apotential Sino-Japanese alliance could likely produce a strong Northeast Asia FTA. Yet,the chances of a Sino-Japanese partnership for regional trade integration cannot beadequately assessed unless we address systematically the competitive dynamics of theirtrade diplomacy in the region.
In sum, existing literature on regional integration in the Western Hemisphere has
clarified the importance of the shift in developmental model among Latin Americancountries towards outward-looking FTAs; as well as the causes and impact of theemergence of “competitive liberalization” in U.S. trade policy. On the other hand, therecent surge of scholarship on East Asian regionalism has helped clarify the external
triggers behind the policy change, the importance of domestic politics in each country’s
FTA approach (the interplay of demand and supply factors discussed above), and theways in which emerging FTAs mesh or do not mesh with already existing trade
governance frameworks. We seek to build upon these insights, but we argue that thescholarship to date has neglected a fundamental aspect of FTA proliferation in the PacificRim. That is the interconnection among different sets of FTA negotiations both withinregions (Western Hemisphere and East Asia) and across them. In other words, it isimportant to assess the extent to which the FTA policies of Pacific Rim countries are
influenced by the externalities generated by prior actions of their peers; whether FTA
diffusion in the region approximates better the expectations of ideational policy diffusion
or economic competition; and within competitive dynamics, the extent to which14

governments’ FTA policy is affected by the need to respond to multiple competitive
pressures (economic, security, or legal) that may or may not be compatible at different
points in time. .

2. The State of Play in FTA Proliferation
After assessing the existing literatures of regional integration theories andregionalism in the Western Hemisphere and East Asia, we now offer a brief overview ofthe empirical evidence on FTA proliferation that constitutes a baseline for the chapters
throughout the book. Our first concern is with ascertaining whether there is in fact
temporal clustering of FTA negotiations. Chart 1 shows that indeed the cumulative
number of preferential trade agreements has increased very rapidly since the early
1990s.10 There were only 25 such agreements notified to the GATT by the end of the
1980s, but that number jumped to over 200 by the late 2000s. This rate of FTA
dissemination has yielded the traditional S-shaped curve found in studies innovation
diffusion in diverse settings (Gray, 1994, Simmons et al, 2006).

[Chart 1 comes here]

Another parameter by which to assess the diffusion of FTA policies is to look at
the types of countries partaking in preferential trading. Up to the late 1980s, the mostcommon type of FTA involved industrialized nations, but since then North-North FTAs’
share of total trade agreements has contracted sharply. Instead, what we find is morediversity in the types of partnerships established through FTAs: North-South and SouthSouth trade agreements. For instance, in the 2000s (as of March 2007), out of 113 RTAs
notified to the WTO, 50 (44 percent) were between developed and developing countries,and 34 (30 percent) were among developing countries (see Chart 2).11 These figures thencorroborate a widening acceptance of free trade agreements in the Third world (of the10

The WTO uses a different nomenclature, Regional Trade Agreements or RTAs to refer to the preferential
trade agreements of interest to this project: customs unions and FTAs . The contracting parties, which are
the WTO members, have the obligation to notify the organization
11
As per the WTO, developed economies include: Canada, U.S., EU, EFTA, Japan, Australia, New
Zealand. Transition economies are former USSR, Easter and Central Europe, Baltic States and Balkans.
The remaining are considered developing economies.

15

developing country WTO members, only Mongolia is not part of at least one FTA); andthe growing interest of industrialized nations to negotiate preferential market access withcountries at very different income levels.

[Chart 2 comes here]

If more countries are willing to negotiate market access on preferential terms, is
FTA diffusion the result of the expansion of existing free trade agreements as newmembers join in, or on the contrary, is it mostly fueled by the proliferation of separate
FTAs? Chart 3 shows that throughout the postwar period, and certainly during the latest
wave of free trade agreements, the vast majority of the new FTAs are “greenfield” FTAs
established among new sets of countries, and do not represent expansion of the old ones
(see Chart 3). In fact, most of the accessions notified, involved rounds of enlargement in
the European integration process, whereas elsewhere in the world the dominant trend by
far was the negotiation of alternative FTAs.12 Geographically speaking, the majority of
the recent FTAs are so-called cross-regional FTAs. In the first half of the 2000s forexample, 58 (51 percent) out of 113 FTAs were cross-regional, and East Asian
governments have demonstrated cross-regional inclinations from the early stage of theregion’s FTA boom in the late 1990s (Solís and Katada, 2007). These two observations
do not bode well for the expectation that FTAs will yield region-wide coherent
integration blocs, and again underscore the importance of assessing whether this clusteredand fragmented pattern of FTA diffusion results from competitive dynamics to be
explored in more detail shortly.

[Chart 3 comes here]

Finally, a striking fact of the recent wave of FTAs is that they only cover amodest volume of trade. As illustrated in Table 1, only a few FTAs such as NAFTA
cover a large proportion of trade for contracting parties. Therefore, standard arguments

12

In other words and as discussed earlier, the new FTAs emerge mostly due to the “second integrative
response” by the government than the first in Mattli (1999)’s terms.

16

on the desire to maximize aggregate welfare gains by negotiating with large economic
partners as the main motivation for preferential trade agreements cannot explain
adequately FTA negotiation or diffusion. Instead, we propose to tease out alternative
mechanisms for FTA proliferation that include the dissemination of policy paradigms
through cross-country policy networks, or the multiplier effect of strategic interaction
among states and interest groups as they maneuver for competitive advantage.

[Table 1 comes here]

3. The analytics of FTA diffusion
Our central objective is to explain the dissemination of FTA policies by using
diffusion models. Diffusion occurs when “the prior adoption of a trait or practice in a
population alters the probability of adoption for remaining non-adopters” (Strang, 1991:
325). And as Garrett et al (2008: 344) have argued, diffusion models challenge theconventional modus operandi in political science of explaining policy outcomes as
domestic responses to common external shocks. 13 Instead, the diffusion literature takes“Galton’s problem” (the interdependence of government choices)14 very seriously, andmakes it the central analytical concern (Braun and Gilardi, 2007). Therefore, indeveloping a diffusion argument to explain FTA proliferation, we posit here that agovernment’s decision to pursue this policy innovation is influenced by the actions ofother countries and is not purely determined by domestic factors.
The next analytical task is of course to ascertain in which ways the prior actionsof governments affect the likelihood that other countries will follow suit with similar
policies. The literature recognizes four main mechanisms of diffusion: 1) “competition”
as an economic and horizontal process whereby countries adopt policies to enhance theirdifferential attractiveness vis-à-vis competitors, 2) “coercion” as strong countries
pressure or manipulate incentives to force weaker countries to adopt a practice, 3)“rational learning” as countries adopt a policy after they assess it objectively and learn
13Peter Gourevitch’s (1978) “second image reversed” has been one of the most influential arguments on
the impact of international factors in domestic policy-making.
14
In statistical analyses, this is usually identified as a problem of spatial dependency or autocorrelation.

17

that it produces benefits, and 4) “emulation” as countries adopt policies that they deem
appropriate and frequently they follow the lead of strong countries or socio-culturalpeers15 (Simmons et al, 2006. Dobbin et al, 2007).
The diffusion literature has already made significant contributions to ourunderstanding of the cross-border dissemination of economic and political liberalism(Elkins and Simmons, 2005, Simmons et al, 2006). However, this literature is still
confronted with the challenge of clearly demarcating among the alternative mechanismsthat increase the likelihood of policy convergence. For instance, soft coercion oremulation are hard to distinguish given that in both cases powerful countries emerge as
the key focal point of policy convergence; rational learning and competition may bedifficult to separate since countries may pursue a policy that has proven successful inorder to keep up with competitors; and epistemic communities are considered importantvehicles for the dissemination of policy paradigms both in the rational learning andemulation mechanisms.
For these reasons, we propose to conflate these mechanisms into two distinct
possibilities: emulation and competition. As Dobbin et al (2007) argue, emulation offers aconstructivist understanding of policy diffusion since it focuses on the role of ideas andthe importance of social acceptance to the dissemination process. Policies diffuse notbecause of an objective examination of their effectiveness, but rather because of themeaning they hold for policy makers and by notions of their appropriateness. Policy
paradigms offer cognitive maps that greatly influence policymakers since they provide “aframework of ideas and standards that specifies not only the goals of policy and the kindof instruments that can be used to attain them, but also the very nature of the problems
they are meant to be addressing” (Hall, 1993: 279). Simmons et al (2006: 801)
distinguish three main emulation processes: 1) powerful countries that are used as
examples; 2) epistemic communities advocating a policy; and 3) influence from sociocultural peer groups. In the first instance, leading countries become the key reference
point as policymakers will copy from “the largest, richest, or fastest-growing countries”
15

These are not the only mechanisms for policy convergence discussed in the literature, but certainly themost prevalent. For alternative specifications of diffusion mechanisms see Bennett (1991: 220) who
identifies emulation, elite networking, harmonization and penetration; or Braun and Gilardi (2007: 299)
who focus on competitive and cooperative interdependence, coercion, learning, common norms, taken-forgrantedness, and symbolic imitation.

18

(Dobbin et al, 2007: 452). In the second case, as professional economists endorse newpolicy paradigms they influence the adoption of policies in areas as diverse as
privatization strategies in Latin America and Europe (Meseguer, 2004) or European
monetary integration (McNamara, 1999). Swank’s (2006: 859-60) work on thedissemination of tax reform views emulation along the lines of the third mechanism, inthat shared cultures and political histories pave the way for dissemination in a manner heportrays as akin to what the sociologist Castles described on his work about “families ofnations.”
Furthermore, the role of ideas in promoting regional integration or the spread of
FTAs is receiving growing attention. Acharya (2000) for instance focuses on theimportance of regionalist discourses to the process of region building. Oyane (2003: 107108) describes the recent wave of FTAs in East Asia as one more example of policy
bandwagoning, and the World Bank (2000) concurs that policy mimicry seems to be an
important factor behind the spread of regionalism (World Bank 2000). Just as in the past
Keynesianism or trade liberalism became entrenched concepts influencing policymaking, the idea of preferential trade liberalization is regarded as shaping how policy
makers define their interests and plot their foreign economic strategies. Policy networks
and communication among experts and policy makers become, then, critical channels
through which emulation and dissemination of ideas take place. These channels are
expected to aid the rapid diffusion of ideas regarding regional preferential tradingarrangements among like-minded countries with social, cultural, and historical ties.
On the other hand, the competitive diffusion of policies takes place when acountry’s actions generate externalities for others, thereby creating an incentive to
respond in kind (Braun and Gilardi, 2007). Therefore, when a competitor adopts a policy,
the other country follows suit to remain attractive to foreign capital or to avoid loss ofmarket share. More than national efficiency gains, competition arguments “stress thedifferential attractiveness of certain policies to investors and buyers in international
markets” (Simmons et al, 2006: 792). So for instance, it is a concern with investment
diversion that encourages developing nations to use bilateral investment treaties (BITs) togenerate credible commitments on the fair treatment of foreign capital in order to outbid
other potential hosts (Elkins et al, 2006: 825). Competitive diffusion models share19

several assumptions: a) the policy innovation has the potential to influence material
outcomes (FDI inflows, market share), b) these effects can be felt in the short to medium
term so it makes sense for elected officials to adopt the new policies and claim credit, c)countries know which nations they are competing against and how intense thecompetition is,16 and d) competition is a horizontal process amongst one’s peers(Simmons et al, 2006: 792-793).
The diffusion literature, therefore, defines competition exclusively as an
economic phenomenon that affects mostly countries lacking credibility or capital (i.e.
mostly developing nations). In our view, however, competition -understood as the quest
for relative advantage- is a multi-dimensional phenomenon comprising economic,
political, and legal elements, which affects both large/industrialized nations andsmall/less advanced countries competing among their peers to secure preferential accessabroad for their internationalized business sectors, to gain regional status, or to become
more influential in defining the direction of the multilateral trading system.17 In short, theprocess involves complex strategic calculations on the part of states as they engage in
FTA negotiations. Therefore there is no guarantee that governments in the region will
pursue coherent region-wide FTAs, as each country is influenced by a particular set ofcompetitive pressures.
After clarifying the concepts of emulation and competition, we proceed to flesh
out three testable hypotheses:

Null hypothesis: The chances that a country will launch an active FTA policy are notaffected by the prior decision of other countries to negotiate preferential trade agreements(this is the null hypothesis for a diffusion model: independent decision making).

16

The intensity of a rivalry is measured by competitive distance among countries: a) how similar are theirexport patterns in terms of market destination and b) in terms of product profile, c) similarity in educational
and infrastructural resources (Elkins et al, 2006).
17
Simmons, Dobbin and Garrett (2006) discuss the actions of powerful countries in the promotion ofliberalism as top-down diffusion in the form of hard or soft coercion. While we agree that industrialized
nations reap the benefits of asymmetrical bargaining in North-South FTAs (see Pekkanen, Solís, Katada,2007), we are reluctant to equate this with outright coercion since large countries frequently derive theirbargaining leverage from the fact that the costs of no-agreement are higher for the smaller party, and not
because of explicit threats of retaliation.

20

Emulation hypothesis: Countries will copy the FTA policies of their socio-cultural peers(identified by ‘psychological distance’: common language, religion, history) or of leading
nations, as cross-national policy networks or epistemic communities play a pivotal role in
the embrace of an FTA track. FTA policies that disseminate through emulation should be“omnidirectional” (i.e. once preferential trade agreements are deemed an appropriate
international trade instrument, governments should be interested in negotiating as many
FTAs as possible with little concern about sequencing) and “homogeneous” (FTAsshould comprise standard rules that mirror closely those of reference nations).

Competition hypothesis: Countries will counteract the FTA policies of their competitors(identified by “competitive distance”: competition over markets and capital,
status/leadership contests, and articulation of alternative models of economic integration).
Business and economic bureaucrats concerned with trade and investment diversion and/or
politicians and foreign affairs officials focused on the foreign policy implications of
FTAs should be the main agents behind the country’s trade policy shift. FTA policies thatspread through competition should be more “selective” (i.e. the pattern of counterpart
choice, market access commitments, and rule-making in FTAs should reflect the desire tocreate or restore competitive advantage) and “heterogeneous” (FTAs should comprise adistinct package of trade and investment rules).
These hypotheses, therefore, generate clearly distinct expectations as to whencountries will be sensitive to the actions of others (either reference nations orcompetitors); which domestic constituencies will champion the policy shift; and what are
the observable implications of either emulation or competition in FTA outcomes.
Moreover, these competing hypotheses also hold diametrically opposed views on theprospects of regional integration. While emulation should lead to a more coherent
regional free trade area as countries imitate their cultural peers in adopting morehomogeneous trade agreements; competition should produce fragmented and inconsistent
FTAs within the same region (see Table 2).

[Table 2 around here]21In order to start operationalizing these variables, we have constructed aggregate
measurements of competitive distance. Table 3 offers a first cut by comparing the export
profile (by market of destination) of selected countries. Countries with very similarexport profiles (measured by the weighted sum of a country’s exports across all trading
partners -averaged from 1995 to 2005) will report higher ratios. The weights represent
each partner’s total imports expressed as a ratio of world imports. In a nutshell, thisindicator shows the extent to which countries have similar concentration of trading
partners, thus, how a pair (appearing on the matrix) compete in third markets. Table 3
demonstrates that there is very intense competition (colored in red) between Japan and
China, Mexico and the United States, as well as Thailand with Singapore and Indonesia.
While a country with the least competition with the countries on the list is Chile.
Tables on export and import concentration are also useful in understanding thetypes of trade competition and in which countries they occur. Table 4 indicates how
much the countries in our list capture the markets of large importers with their exports.
For example, Japan, China and Mexico all capture a sizable share of the US market (eachwith 10-11 percent of US imports). In the case of the Chinese market, Japan, Korea, andthe United States have a large presence. Finally, the United States and China alone supply
close to one third of Japanese imports. Table 5 captures how large importers such as theUnited States and Germany (sorted by the country’s share of world imports) are major
markets of destination for the exporters listed. For example, the United States captures
26 percent of China’s exports to the world, while 82 percent of Mexico’s exports go to
the United States. It is important to note, however, that the purpose of these tables ismerely to provide a baseline since the trade competition measured here does not capture
rivalry on specific products or the role of MNCs and intra-firm trade, both of which
influence trade patterns.

[Tables 3, 4 and 5 around here]
The diffusion literature offers sophisticated quantitative tests for large-N studies
of BITs dissemination (Elkins et al, 2006), the spread of market-oriented tax reform22

(Swank, 2006), and public sector downsizing (Lee and Strang, 2006).18 We opt, however,for process tracing methodology in assessing the extent to which a country’s FTA policy
is influenced by emulative or competitive diffusion forces. We argue that this qualitative
methodology is better able to capture the less easily quantifiable signs of emulation andcompetition such as the emergence of policy paradigms, intense industry rivalries that are
not captured by aggregate levels of economic exchange, diplomatic contests to enhance
regional influence or security, and attempts to disseminate new rules on trade andinvestment. Our qualitative methodology informs the structure of all country chapters, as
they test the alternative hypotheses outlined above. In so doing, all chapters ask a few
basic questions: a) what triggered the policy change (purely domestic factors or actions ofsociocultural peers or competitors)? b) how were the international pressures for diffusion
channeled through the domestic policymaking process (who mobilized in favor of FTAs
–epistemic communities, business, or bureaucrats- and/or is the decision making process
top-down or bottom up?) c) To what extent do FTA outcomes (in terms of the timing andselection of countries, market access and rules commitments) approximate better the
expectations of emulation or competition mechanisms?

4. Competition as a Multi-Dimensional Concept
A distinct trait of the diffusion model developed here is that it treats competition
as a multi-dimensional process comprising economic, security, and legal motivations. In
order to understand more fully how FTAs can be used to advance competitive goals along
these issue-areas, three thematic chapters in this volume explore in depth the different
logics of FTA competition. We summarize briefly these logics below, in order to discuss
the implications of adopting a more expansive view of the range of competitive pressuresand goals at stake in FTA proliferation

Economic Competition

18

Yet, these statistical analyses are sometimes confronted with the problem of finding adequate proxies forthe variables they are testing. For instance, Weyland (2006: 14) objects to the frequent use in the diffusion
literature of an IMF loan as evidence of coercion, since local elites may have sought the deal with the IMF
to enhance their leverage over domestic reforms. For that reason, Weyland also opts for a qualitative
methodology in his diffusion work on pension privatization.

23

Contrary to the most-favored nation principle of the WTO, the essence of FTAs isthe exchange of trade and investment preferences that are not made available to third
parties. Preferential liberalization, therefore, creates new incentives for private sector
lobbies and governments to achieve competitive goals through these agreements. On theeconomic front, these objectives include improved market access through tariff andinvestment liberalization, the harmonization of product standards, policy coordination inareas such as competition and anti-dumping, or the elimination of non-tariff barriers(NTBs). Because these concessions are only extended to FTA parties, they enable
member companies to out-compete their rivals through preferential treatment. FTAs alsooffer a potent form of non-transparent protectionism through rules of origin (ROOs) thatcan be manipulated to disadvantage non-member producers. Excluded parties, therefore,
have a strong incentive to negotiate countervailing FTAs to minimize the effects of tradeand investment diversion.19
These series of moves and countermoves of FTA negotiations create anothercompetitive element that has received less scholarly attention: “concession linkage.”With the rapid multiplication of FTAs, preference erosion has become a real problem
since the initial advantages secured by members of the first FTA are undermined assimilar benefits are extended to other countries through subsequent preferential tradenegotiations. Governments have adjusted to this possibility by introducing renegotiation
clauses and periodic updating of preferences. FTA concessions are, therefore, not fixed,
but can be adjusted over time. Further reflecting the interconnectedness of FTA
negotiations, concession linkage also has signaling effects that influence a country’s
bargaining behavior. FTA negotiators are keenly aware of the fact that tariff concessions
in current FTA talks will become the minimum baseline for future FTA negotiations.
This “shadow of the future” frequently persuades governments to adopt more defensive
positions in on-going FTA talks, lest they lose bargaining power in subsequent FTAs.
Summing up, FTAs offer interest groups and governments the ability to get ahead
in international economic competition in several different ways: preferential trade andinvestment access, onerous rules of origin for nonmembers, targeting of rents for
19

Along these lines, Manger (book manuscript) explains the proliferation of defensive North-South FTAs
by highlighting the role of MNCs seeking preferential investment access in developing countries to reap
early-mover advantages and/or to reduce production costs in fragmented production chains.

24

investors and exporters while maintaining the mantle of protection for uncompetitive
sectors, and concession linkage to secure better deals in subsequent trade talks.

Political/Security Competition
Free trade agreements are also useful in pursuing non-economic foreign policy
objectives. Traditionally, this agenda has been discussed in terms of alliance politics.
FTAs can be a useful tool in affecting inter-state alignment patterns by establishing closer
economic links with security partners, employing them as confidence building measuresvis-à-vis rivals, or using them instead to isolate competitors by excluding them from
economic cooperation agreements negotiated with other nations. FTAs can also be used
to increase a country’s political influence or status, and the degree of ambition on thisfront is heavily influenced by a country’s power resources (both hard and soft forms of
power). So for instance, for medium-sized countries, FTAs offer the opportunity ofacquiring greater visibility in the politics of international trade as they establish
themselves as trade hubs (for instance, Chile, Mexico, South Korea and Singapore haveemphasized this goal). For large countries, it is about emerging as credible regional
leaders capable of acting as focal points in the integration process, thereby defining themembership of the regional bloc, the sequence of the integration movement, and offering
if necessary side payments (Mattli, 1999). For example, Japan, China, and the UnitedStates are currently vying for this position in East Asia.

Legal Competition
The difficulty the WTO has experienced in adopting a new set of trade rules on
issues such as investment protection, competition policy, and labor or environmental
standards, has created an incentive for many countries to compete through their FTAs inthe definition and dissemination of new rules in these areas. FTAs are attractive venues
for adoption of new rules on trade and investment that have proven unwieldy at themultilateral level for several reasons. First of all, there is the advantage of small numbersof partners, as it is easier to reconcile the preferences. Second, these preferential
negotiations allow for the selection of “common view” partners with similar positions on
the negotiation agenda. And third, because many of the recent FTAs pair industrialized

25

with developing nations, the larger party uses its asymmetric market power to gain
control over the negotiation agenda (Pekkanen, Solís, and Katada, 2007). Developing
nations are prepared to make concessions bilaterally (i.e. incorporation of the new issues
in international trade and investment) that they are unwilling to make multilaterally luredby the prospect of preferential access to important export markets and the desire to attract
inflows of foreign direct investment (Ethier, 1998). But there is a strategic calculation as
well: holding out on multilateral commitments increases the attractiveness of thesedeveloping nations as FTA partners since only through preferential trade negotiations
will they endorse some WTO plus commitments.
The race to push for the adoption of new rules on trade and investment throughFTAs is guided by two fundamental objectives. One, which we label standard setting,seeks the dissemination across several FTAs of a new rule or standard that can later on beincorporated more widely at the multilateral level (for example, intellectual protection,
investment protection, or anti-dumping disciplines). The second objective, we describe asa strategy of lock-in whereby nations offer alternative models of economic integrationthat differ in the degree of legalization, escape clauses, and the scope of WTO plus
commitments. For both legal strategies early mover advantages are very strong since thefirst preferential negotiations usually set important precedents so that the firstcommitments become default approaches guiding subsequent negotiations. Thus, theterm “race” quite literally describes FTA proliferation.

Implications
The decision to adopt a multi-dimensional characterization of competition that
goes beyond defensive economic interests has important implications for the analysis of
FTA proliferation. First, it raises the possibility that the rapid spread of FTAs is due totheir “flexibility benefits.” In other words, governments approve of the fact that they canpursue multiple goals through FTA diplomacy in ways that may not be possible throughother instruments. This is clear particularly in contrast to BITs: through FTAs,
policymakers can simultaneously push for trade and investment liberalization, and due totheir deeper integration agenda including economic cooperation clauses, they can more
effectively boost diplomatic relations with selected countries. Consequently, and more26

problematic for the analyst, FTAs may frequently be “over-determined” since they may
be animated by different competitive pressures. We believe that the task of sorting out theweight of these competitive pressures triggering individual FTAs should begin with aclear demarcation of the competitive goals at stake in each issue-area as the thematic
chapters in this volume attempt to do. Furthermore, there could be a marked contrast
among governments regarding the type of competitive pressure that triggers FTA frenzy.
For example, small trade dependent countries such as Chile might perceive economic
competition as a formidable force. Meanwhile, given the historical and geopoliticalcontext, Japan and China may be sensitive to political points that they can score throughFTAs with smaller partners. Finally, in our view, the conceptualization of competition asa multi-dimensional process enriches the research agenda in one more way: it
underscores the very real tradeoffs among competitive goals and focuses our attention on
the ways in which governments may negotiate among contradictory competitive goals.

5. Overview of the chapters in this volume(To be developed more fully later as we read the second draft of the chapters)

6. Final Remarks(To be developed more fully later as we read the second draft of the chapters)

Contributions of this project:
1) In this project, we have attempted to offer a novel analysis of the FTA frenzy thatconnects the proliferation of FTAs to the burgeoning policy diffusion literature. This
allows us to consider whether the forces of emulation or competition, found be to so
powerful in the studies of dissemination of market reform and democracy, areresponsible for the rapid spread of free trade agreements.
2) We expand the notion of competition prevalent in diffusion studies to encompass
economic, security and legal motives, and this allows us to also probe into the ways inwhich governments respond to contradictory competitive goals.

273) We highlight the interconnection among FTAs by going beyond the notions of tradeand investment diversion, and noting the significance of concession linkages at the timeof negotiation and the incorporation of renegotiation clauses to address the phenomenonof preference erosion.
4) We put on the table an interesting proposition to assess: whether the competitive
incentives behind FTA proliferation may weaken the emergence of coherent trade blocs
in different ways: through preference erosion of earlier FTAs; by weakening regional
solidarity as individual members of existing trade groupings negotiate separate tradedeals with larger nations; and by encouraging cross-regionalism or the development ofalternative FTA networks within the same region.
The findings of this research project regarding the mix of objectives and specificmechanisms through which some of the most active preferential traders construct their
FTA networks, should also be of interest to policy-makers seeking to understand thedrivers, direction, and consequences of the ever-expanding number of FTAs in the world
economy.

28

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34

Table 1

Partner Trade as % of Country Trade with World (avg.)

Country
Chile

Partner
CanadaMexicoCosta Rica
El Salvador
EC
United States
S. Korea
EFTA*
LAIA**

China***

ASEAN****
Bangkok Agreement*****
Hong Kong
Macao

Mexico

Japan
Chile
NAFTA
IsraelEFTA*
Colombia, Venezuela
Nicaragua
Costa RicaEC
El Salvador
Honduras
Guatelmala
Bolivia
Uruguay
LAIA**

Japan

Singapore

FTA in effect
1997
1999
2002
2002
2003
2004
2004
2004
1981

1980-1989 1990-1999 2000-2005
1.56
1.46
1.89
0.70
2.34
3.58
0.00
0.07
0.03
0.00
0.03
0.08
28.72
24.23
20.32
21.76
18.51
15.91
1.65
3.34
3.86
0.94
0.86
0.71
19.65
20.97
25.62

2003
2002
2004
2004

5.30
0.54
20.45
0.54

6.70
5.57
21.31
0.35

8.81
8.59
10.52
0.16

2005
1999
1994
2000
2001
Signed
1998
1995
2000
2001
2001
2001
Negotiation
Negotiation
1981

5.96
0.19
64.40
1.20
0.70
0.50
0.18
0.20
16.41
0.20
0.09
0.35
0.01
0.16
3.98

3.18
0.38
79.20
0.13
0.59
0.63
0.03
0.12
8.73
0.11
0.06
0.24
0.02
0.08
2.91

2.91
0.45
75.75
0.11
0.35
1.72
0.05
0.24
7.02
0.09
0.06
0.21
0.01
0.05
2.85

Malaysia
MexicoSingapore

2006
2005
2002

1.97
0.87
2.13

2.93
0.79
3.22

2.88
0.77
2.57

AFTA****
EFTA*
Japan

1992
2003
2002

20.00
0.91
14.58

23.66
1.03
13.86

29.27
1.08
9.82

Jordan
New Zealand
S. Korea
Australia
United States

2005
2001
2006
2003
2004

0.03
0.61
1.75
2.64
16.78

0.02
0.27
3.04
2.00
17.89

0.01
0.29
3.92
2.44
14.31

Chile
Singapore
EFTA*
Bangkok Agreement*****
United States

2004
2006
2006
1976
Signed

0.33
1.41
1.23
4.23
28.28

0.52
2.76
1.26
10.81
21.20

0.48
2.41
0.70
19.09
16.78

United States Central America-DR******
Chile
JordanAustralia
BahrainIsraelMoroccoSingapore
NAFTA
S. Korea
Oman

2006
2004
2001
2005
2006
1985
2006
2004
1994
SignedSigned

0.99
0.33
0.08
1.43
0.05
0.76
0.08
1.41
24.42
3.04
0.07

1.38
0.41
0.03
1.17
0.05
0.86
0.06
2.25
28.67
3.26
0.04

1.51
0.38
0.05
0.96
0.04
1.02
0.04
1.61
31.45
3.10
0.04

South Korea*EFTA is Iceland, Liechtenstein, Norway & Switzerland. Partner data is the sum of DOTS data for
Iceland, Norway, & Switzerland. Liechtenstein is not included as a separate entry in DOTS data.
**LAIA is Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, Mexico, Paraguay, Peru,
Uruguay, & Venezuela. Partner data is the sum of DOTS data these countries.
***In DOTS data, China is divided into Mainland, Hong Kong, and Macao. Because WTO treats thedeals with HK and Macao as separate RTAs, the data here labeled as "China" represents only the
Mainland.
****ASEAN is Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, Vietnam. Data here is the DOTS sum for these countries.
*****Bangkok Agreement is with Bangladesh, S. Korea, India, Laos, & Sri Lanka. Partner data is thesum of DOTS data for these countries.
******CAFTA-DR is with Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, andNicaragua

Table 2
FTA diffusion: Emulation versus Competition

Diffusion Pressures
Emulation
Prior actions of socio-cultural peers
or leading nations increase information
about a policy and pave way for itssocial acceptanceCompetition
Prior actions of competitors that:● Create trade and investment
diversion, and/or● Increase the relative influence ofrival states, and/or● Disseminate alternative models ofregional integration

Domestic Policy-making
Process*

Country FTA
Outcomes

Regional Integration
Outcomes

Epistemic communities playleading role in influencing
policymakers

Omnidirectional (negotiate with as
many partners as possible withlittle concern about sequencing)
Homogeneous (negotiate FTAs
with standard rules that mirror
closely those of reference nations)

Coherent regional integration
process as shared views on the
merits of FTAs and homogenous
agreements pave the way forrounds of enlargement

Business groups, economic
bureaucrats, politicians or foreign
affairs officials push for FTA
policy shift

Selective (choice of partners,
timing of negotiations and market
access commitments reflect
strategic calculus to advancecompetitive advantage)
Heterogeneous (push for distinct
packages of trade and investment
rules)

Fragmented regional integration
process as competitive dynamics
produce preference erosion ofearlier FTAs; weaken the solidarityof existing regional subgroups asindividual members negotiate
separate trade deals; encouragecross-regionalism and/or thedevelopment of parallel FTA
networks

Notes: The model is agnostic on the whether policymaking process is top-down or bottom-up and expects national variation in decision-making
patterns

Table 3. Competitive Distance: Similarity in export profiles by market of destination (average 1995-2005)

China, P.R.
China, P.R.

Japan

US

MexicoKorea

Malaysia Singapore Thailand

Indonesia Philippines

Chile

1

Japan

0.996

1

United States

0.751

0.755

1

Mexico

0.664

0.667

0.884

1

Korea

0.314

0.316

0.419

0.473

1

Malaysia

0.210

0.211

0.279

0.316

0.667

1

Singapore

0.164

0.165

0.219

0.247

0.523

0.784

1

Thailand

0.140

0.141

0.187

0.211

0.446

0.670

0.854

1

Indonesia

0.114

0.115

0.152

0.172

0.363

0.544

0.694

0.812

1

Philippines

0.091

0.091

0.121

0.137

0.289

0.433

0.552

0.647

0.796

1

Chile

0.039

0.039

0.051

0.058

0.123

0.185

0.235

0.276

0.339

0.426

0.99 - 0.80

0.59 - 0.40

0.79 - 0.60

0.39 - 0.20

0.19 - 0.00

Footnotes: The competitive distance is calculated based on the following method:

1. The export profile of each country is first estimated through a weighted sum of each of its trading partner's export share multiplied by that partners' share of world imports.

2. Next, the export profiles of pairs of countries are compared as a simple ratio. The higher the ratio, the more similar is their distribution of exports by market of destination.

Source: IMF, Direction of Trade Yearbook

1

Table 4: Top exporters in large importing nations (%)
EXPORTERIMPORTER

China, P.R.

Japan

United States Mexico

Korea

Malaysia

Singapore

ThailandIndonesia Philippines

Chile

United States (17%)

10.37

11.28

-

10.29

2.96

2.05

1.53

1.34

0.90

0.94

0.34

Germany (8%)

4.04

4.32

7.57

0.26

1.08

0.65

0.68

0.45

0.44

0.33

0.17

Japan (5.4%)

16.14

-

18.60

0.51

4.80

3.30

1.62

2.97

4.18

1.63

0.82

France (5.1%)

2.58

2.33

6.79

0.16

0.59

0.41

0.64

0.37

0.27

0.09

0.23

United Kingdom (5%)

2.78

4.29

11.77

0.22

1.24

0.94

1.26

0.70

0.48

0.40

0.20

Italy (3.8%)

3.09

2.09

4.47

0.12

0.90

0.26

0.16

0.37

0.42

0.07

0.37

Canada (3.6%)

4.28

4.39

63.34

3.22

1.35

0.67

0.36

0.49

0.27

0.29

0.22

China,P.R. (3.6%)

-

17.83

9.26

0.30

10.50

2.77

2.50

1.92

1.50

1.20

0.55

Footnotes:
1. Each cell in a column shows the market share of an exporter in the total imports of an importer. For example, 10.37% of the US imports come from China.
2. Importers are sorted by their share of total world imports (percentages in parentheses after the name of the country).

Table 5: Key destination markets for selected exporters (%)
EXPORTERIMPORTER

China, P.R.

Japan

United States Mexico

Korea

Malaysia

Singapore

ThailandIndonesia Philippines

Chile

United States (17%)

25.88

26.23

-

81.83

19.39

20.43

16.41

20.16

16.06

26.25

17.46

Germany (8%)

4.64

4.62

5.10

0.94

3.27

2.98

3.37

3.13

3.61

4.30

4.15

Japan (5.4%)

12.84

-

8.68

1.29

10.03

10.47

5.55

14.24

23.78

14.54

13.53

France (5.1%)

1.92

1.62

2.98

0.38

1.16

1.23

2.05

1.67

1.43

0.79

3.64

United Kingdom (5%)

2.07

2.98

5.16

0.51

2.44

2.79

4.05

3.14

2.54

3.34

3.03

Italy (3.8%)

1.71

1.07

1.45

0.20

1.31

0.58

0.39

1.22

1.65

0.44

4.22

Canada (3.6%)

2.28

2.17

19.73

5.45

1.89

1.42

0.83

1.56

1.04

1.73

2.44

China,P.R. (3.6%)

-

10.21

3.34

0.59

16.94

6.79

6.61

7.09

6.59

8.27

7.06

Footnotes:
1. Each cell in a column shows the share of an importer in the total exports of an exporter. For example, 25.88 % of China's exports go to the United States.
2. Importers are sorted by their share of total world imports (percentages in parentheses after the name of the country) .

Chart 1: FTA Diffusion in the World Economy(cumulative RTAs by date of entry into force)

200
150
100
50

Source: http://www.wto.org/english/tratop_e/region_e/regfac_e.htm

20
08

20
04

20
00

19
96

19
92

19
88

19
84

19
80

19
76

19
72

19
68

19
64

19
60

19
56

19
52

0
19
48

No. of RTAs

250

Chart 2: FTA Partnerships among Developed and Developing Countries

100%

80%

60%

40%

20%

0%
1950-1959

Developed-Developed
Developing-Transition

1960-19691970-1979

Developed-Developing
Transition-Transition

1980-1989

1990-1999

Developed-Transition

2000-2007 (3/1)

Developing-DevelopingChart 3: FTA Diffusion: Enlargement versus Proliferation(number of RTAs reported to the GATT/WTO by decade)
120

100

Accession to existing FTAs

Green Field FTAs

80

60

40

20

0
1950-1959

1960-19691970-1979

1980-1989

1990-1999

2000-2007 (3/1)

GIARI Working Paper Vol. 2008-E-4,
June.30, 2008
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
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