自由論題［研究論文］

Domestic Institutional Quality as a
Factor in East Asian Regionalization

東アジア諸国の国内制度が地域統合に与える影響
Tamás Mészáros

Doctoral Program, Graduate School of Media and Governance, Keio University

メーサーロシュ・タマーシュ
慶應義塾大学大学院政策・メディア研究科後期博士課程

Abstract:

Recent research questioning the overall trade creation effects of some East AsianFree Trade Agreements calls for the investigation of the influence of other variables
on regional trade. To this end, this paper examines the effects of domestic institutional
quality, and the changes thereof, on trade among East Asian economies by using
the gravity model of trade. The results show that domestic institutional quality has asignificant positive effect on trade, which suggests that improving domestic economic
governance should be prioritized in future trade agreements.
近年の研究では、東アジアにおける自由貿易協定の貿易創出効果に対する疑問が報告されているため、地域の貿易に影響を与える他の要因を検証する必要がある。したがって、本稿では、各国の国内制度が東アジアの貿易へ与える影響について、重力モデルを用いて実証分析する。その結果は、国内制度が貿易へプラスの効果をもたらすことを示した。

Keywords: international political economy, regionalization, free trade agreements, East Asian
regionalism, gravity model

国際政治経済学、リージョナル化、自由貿易協定、東アジアのリージョナリ
ズム、貿易における重力モデル

1

Introduction
East Asia had experienced rapid economic development over the past decades

and emerged in the 21st century as a global center for manufacturing and anincreasingly important market. This rapid transformation was achieved in large partthrough harnessing international trade and Foreign Direct Investment (FDI). Regional
economies pursued trade-based growth strategies and relied heavily on foreign
markets and foreign inputs throughout their development (Kimura, 2006). Since the258Domestic Institutional Quality as a Factor in East Asian Regionalizationlate 1980s, an increasing part of their success was based on the expansion of regional
production networks in the manufacturing sector, which bind together numerous
economies of varying size and levels of development, and contribute to the highlevels of intra-regional trade and investment in East Asia (Kimura and Ando, 2005).
The common narrative in the International Political Economy (IPE) literature isthat this economic architecture emerged due to market forces. Facing rising domestic
wages and the appreciation of the Japanese yen, in the late 1980s Japanese firms
began to relocate their production to Southeast Asia and China, sowing the seeds ofregion-wide production networks. The market-based nature of this process underwent
a major shift after the Asian Financial Crisis of 1997-98, which gave impetus for theestablishment of regional institutions to manage interdependence with and within the
Association of Southeast Asian Nations (ASEAN), such as the Chiang Mai Initiative,
the ASEAN+ process, and the proliferation of bilateral and ASEAN+1 Free Trade
Agreements (FTA) (Urata, 2019). More recently, an increasing number of plurilateralʻmega-FTAsʼ have been negotiated to unify the plethora of bilateral FTAs (Watanabe,2016); the Comprehensive and Progressive Agreement for Trans-Pacific Partnership(CPTPP) entered into force in 2018, while the Regional Comprehensive Economic
Partnership (RCEP) is under negotiation as of early 2020 1).
Recent research tends to focus on these institutional arrangements. A large bodyof the economics and IPE literature investigates the economic utility and politicalbackground of FTAs, while the International Relations (IR) literature has been
focusing on regional powersʼ strategic interests behind institution-building.
Nevertheless, recent findings suggest that the ʻmarket-basedʼ logic of the previous
decades remains important. A substantial part of recent trade liberalization has beenachieved through unilateral measures by national governments, and changes indomestic economic policies and institutions remain key contributors to trade in East
Asia (Baldwin, 2011). Moreover, recent research highlighted that FTAs produce
heterogenous effects on trade, and some East Asian FTAs did not lead to the
expansion of participantsʼ trade levels (Ando et al., 2019; Yamanouchi, 2019). Thissuggests that factors other than FTAs continue to influence trade and investment
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自由論題

flows in the region.
This paper aims to contribute to the research on the role of such factors byinvestigating how and to which degree did domestic institutional quality, and thechanges thereof, influence international trade within the ASEAN Plus Six. I argue
that regional states considered international trade and investment as a vehicle ofnational development and instituted domestic reforms to be able to harness the forcesof regionalization and globalization. Consequently, the hypothesis of the paper posits
that domestic institutional quality is expected to have a significant and positive effecton regional trade. The hypothesis was tested by utilizing the gravity model of trade to
explore the relationship between independent variables representing domestic
institutional quality, regional trade as the dependent variable, and FTAs andexogenous factors such as infrastructural and financial development as control
variables.
Previous studies have found a significant link between the quality of domestic
institutions and trade 2) (Nunn, 2007; Levchenko, 2007; Nunn and Trefler, 2014),
supporting this analysis. Nevertheless, this study differs from previous ones in two
important aspects. First, it investigates the role of institutions specifically in East
Asia, instead of looking at global effects. Second, and more importantly, it aims to
not only capture the effects of domestic institutions on trade but to compare those toother variables, namely FTAs and exogenous factors. This means that the implicationsof these findings are more relevant to the study of East Asian regionalism.
The paper is organized as follows. The next section sets out the background of
the hypothesis and provides the conceptual tenets of the study. The third section
describes the operationalization of the variables and the specification of the gravity
models. The fourth section introduces the estimation results and discusses thefindings, followed by the conclusion.

2

Research background2.1

A brief overview of East Asian regionalization and regionalism
Traditional theories such as Vinerian economics and neofunctionalism treat

260

Domestic Institutional Quality as a Factor in East Asian Regionalization

regional integration and regionalism as politically led phenomena, which rest on theestablishment of international institutions in order to reduce barriers to the movementof factors of production among nations. East Asiaʼs development challenges thisnarrative, for it represents a form of de facto regional integration (regionalization)
without well-developed de jure institutionalized integration (regionalism) (Watanabe,2016). Although it lacks a region-wide political institution providing for free tradesuch as the European Union (EU) or the North American Free Trade Agreement(NAFTA) 3), East Asia is home to dense regional production networks which are moresophisticated than either European or North American ones (Kimura, 2006). In termsof the share of intra-regional trade in total trade, an often-used metric of regional
integration, East Asia is the second most integrated region of the world behind theEuropean Union, as Figure 1 shows.
60

Asian ﬁnancial crisis
WTO ITA

50

Plaza Accord

China’s WTO accession

12000
10000

APEC

40

8000

30

6000

20

4000

10

2000

0

0

-10
-20

AFT
CMI
APT
Reform in China, compe��ve liberaliza�on

RTA prolifera�on

Export-oriented industrializa�on in Japan, NIEs

Intra-regional trade share

Share in world exports

Share in world imports

Value of total trade

-2000
-4000

Figure 1 East Asian trade since 1960.

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自由論題

This theoretical paradox is usually explained through the agency of market
forces: Multinational Enterprises (MNEs) created these production networks to takeadvantage of the differences in location advantages and production costs across theregion even in the absence of regionalism 4). Moreover, it has been argued that themarket-led integration of the late 1980s and the 1990s has morphed into institutionled integration from the early 2000s through the proliferation of regional FTAs
(Urata, 2019). According to data from the World Trade Organization (WTO), East
Asian states were parties to a cumulative 87 regional trade agreements in 2019.
However, this narrative has been challenged on several fronts. Some scholars of
IPE argue that East Asian FTAs serve political goals, and their contribution to tradecreation is marginal (Baldwin, 2008; Ravenhill, 2010). A neorealist IR version of thisnarrative states that East Asia is beset by ʻinstitutional balancing,ʼ where regional
powers pursue institutionalization to attain their geostrategic goals or thwart the goalsof their competitors (Lee, 2014; He, 2018). A more balanced IPE approach posits that
East Asian FTAs focus narrowly on vertically differentiated intra-industry trade (inother words, the institutionalization of production networks) and neglect other aspects
of integration (Manger, 2014). Finally, recent economics literature suggests that theeffects of FTAs are heterogenous, meaning that they might affect certain sectors andcountries positively, while others neutrally or even negatively (Baier, Bergstrand, andClance, 2018). In fact, recent studies investigating Japanese FTAs found that those
did not make significant contributions to Japanʼs trade with its FTA-partners (Ando etal., 2019; Yamanouchi, 2019). In sum, it is reasonable to investigate factors other thanFTA-formation as explanatory variables of regional trade.
To this end, this paper invokes a combination of neoinstitutionalist IPE theory
and the empirical findings of economics. As explained by Keohane (1984), thepurpose of international institutions is to reduce uncertainty, transaction costs andasymmetries of information among actors in the international system. In practice,
FTAs serve the same purpose with regards to the transnational operation of sub-state
actors, namely MNEs. However, in the case of MNEs, the reduction of uncertainty,
transaction costs and asymmetries of information can be achieved not only on the262

Domestic Institutional Quality as a Factor in East Asian Regionalizationinternational level but also on the domestic one. From this perspective, East Asiaʼs defacto integration has been heavily supported by state actors through domestic policies
and institutional arrangements even in the absence of regional institutions.
Domestic institutional reform was theorized as a key driver of East Asian
growth as early as the World Bankʼs (1993) report on the East Asian ʻmiracle.ʼ Morerecently, students of Development Economics posited that institutional change is themost important explanatory variable of economic development (Acemoglu andRobinson, 2012). As mentioned above, previous studies have also found a positive
relationship between the quality of domestic institutions and trade. Hence, it would
be reasonable to expect that domestic institutional quality affects trade flows in EastAsia.
In addition, a strand of research debates whether the expansion of regional trade
can be separated from globalization, or in other words, if regionalism is anautonomous phenomenon or merely a part of a global one (Chen and Lombaerde,2014). Recent papers by Ando and Kimura (2013, 2014) showed that the geographicalreach of East Asian production networks have been expanding, as the region has
become an important source of imports for production networks in Central andEastern Europe and North America. Consequently, some authors refer to Global
Value Chains and global production networks instead of regional ones (Baldwin,
2016, p. 6). While the relationship between regionalization and globalization isbeyond the scope of this study, the WTO will be included in calculations as
representing (although only partially) global institutional change.
2.2

Domestic sources of regionalization
As Kimura and Ando (2005, pp. 179-180), Kimura (2006, pp. 337-340) and

Baldwin (2016, pp. 98-105) detail, the development of regional production networks
has been backed by “a great transformation of the development strategies” of East
Asian countries. Over the 1970s, most ASEAN members and China employed a dualtrack approach to industrialization, trying to foster both import-substituting andexport-oriented industries at the same time, but also relying on incoming FDI for the
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lack of technological capacity.
Nevertheless, until the mid-1980s, their attitude toward foreign companies wascautious: import-substituting FDI faced severe regulatory burdens. As the dual-trackefforts had produced mixed results, first in Malaysia and Thailand in the late 1980s,
and from the early 1990s in the Philippines, Indonesia, and China, the selective
approach towards FDI was replaced by the “accepting everybody” policy in most
sectors. East Asian emerging economies began to actively compete for incoming FDI
by upgrading their location advantages and reducing the cost of foreign investment
and endeavoured to host as many exporting MNEs as possible through concentrated
domestic policy accommodation.
The period from the mid-1980s to the 1990s is often described as “race-to-thebottom liberalization.” Tariffs on intra-regional trade have receded dramatically due
to unilateral tariff reductions to attract inward FDI. Additionally, duty-drawback
systems allowed exporting MNEs to get waivers for the duties and tariffs on theimported inputs used in the production of their exported products. (Baldwin, 2008,
pp. 453-462; Kimura and Ando, 2005, p. 213). As Baldwin (2008, p. 458) underlines,“it is useful to think of this sort of tariff-cutting as “quasi-regionalism” because its
effect is to reduce tariffs only on intra-regional trade, but it was not formallydiscriminatory.”
In summary, the success of East Asian regionalization was based on substantial
domestic reforms. Domestic policies promoting trade and FDI-hosting
competitiveness continued even in the early 2000s. For most states of the region,“comprehensive domestic regulatory reform dominates as an integration strategy”(Dee, 2008, p. 151).
2.3

Additional factors on the regional and global level
While domestic policy accommodation was an important catalyst ofinternational production network development, the fragmentation of production andoutsourcing was made possible in the first place by technological improvements: thereduction of transportation costs and the advances in information-communication

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Domestic Institutional Quality as a Factor in East Asian Regionalization

technology (ICT). Technological change and the expansion of physical infrastructure
were identified as key factors shaping the transnational structure of production(Baldwin, 2016; Olarreaga, 2016).
Further support for regionalization came from the regional and global levels.
Despite its unambitious goals, the ASEAN Free Trade Area has slowly developed
into “one of the cleanest and most effective regional trade arrangements in the world”
since its adoption in 1993 (Kimura, 2006, pp. 338-339). The AFTA was followed by araft of bilateral and ASEAN+1 FTAs. While recent research debates the magnitude of
the overall trade-creation effects of these, they played an important role in reducing
trader barriers and transaction costs in East Asia (Mutsvangwa et al., 2019), and thus
their net contribution was certainly positive (Urata, 2019).
Of similar importance were global agreements. While the WTOʼs influence has
been waning, the General Agreement on Tariffs and Trade (GATT), and later the
WTO provided foundation for the development of production networks throughglobal liberalization (Baldwin, 2016, pp. 69-75). The WTO Information Technology
Agreement (ITA) was especially important, for it liberalized the trade ofsemiconductor-related parts and components. This, coupled with the extensive use of
the duty drawback systems, meant that production network-forming firms in theelectric machinery sector barely paid tariffs from the late 1990s onward (Kimura,
2006, p. 340).
Further trade-creation stemmed from Chinaʼs WTO-accession in 2001, andVietnamʼs in 2007. For both China and Vietnam, joining the WTO required
widespread tariff liberalization and the adoption of the international rules ofcommerce. Thus WTO-accession led to domestic institutional reforms in these two
quasi-socialist economies, while providing them access to the world markets.
This highlights an important aspect of the interplay between international
institutions and domestic reform, namely that FTAs institute domestic reform. First,
trade liberalization alters the domestic political economy by strengthening proliberalization sectors (exporters), which leads to a self-sustaining cycle ofliberalization and pro-business reform, called the juggernaut effect (Baldwin, 2016, p.
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69). Second, the reduction of Non-Tariff Barriers, regulatory burdens, market
distortions due to discriminative domestic competition policies, and other so-called
WTO+ and WTO-X issues, have become increasingly central elements of FTAs. In
the words of Baldwin (2011, p. 28), instituting domestic reform has become the key
goal of contemporary FTAs.
On the one hand, this means that FTA-negotiators seek to improve the trade andinvestment environment by mandating domestic reform, which line up with the
hypothesis of this paper. On the other hand, such developments make it harder toseparate the effects of domestic reform and FTA-formation on trade, since theseincreasingly go hand in hand, and FTAs produce both ex ante (reform as arequirement for participation) and ex post effects on both institutions and trade. In thescope of this paper, however, such effects of FTAs appear to be meagre. As mentioned
above, East Asian FTAs are often criticised for requiring weak commitments fromparticipants, and the connection between regulatory reform and FTA-participation is
not evident in the dataset used in this study 5). Nevertheless, the case may be different
for CPTPP and RCEP, which are discussed later on.

3

Research methodology

3.1

Variables and data sources
What follows from the previous discussion is that East Asian regionalization canbe conceptualized as dependent on multiple institutional variables across the regional,
global, and the domestic level of analysis, with domestic institutions playing asubstation role in the process.
To test the hypothesis, four ʻbroadly definedʼ institutional variables wereoperationalized: (1) the quality of domestic institutions and governance in a country;(2) financial development; (3) infrastructure; and (4) the quality of FTAs a country issignatory to.
The governance variable is constructed from the World Bankʼs Worldwide
Governance Indicators dataset (World Bank, 2018). The data covers six indicators: (i)Voice and Accountability; (ii) Stability and Absence of Violence; (iii) Government

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Domestic Institutional Quality as a Factor in East Asian Regionalization

Effectiveness; (iv) Regulatory Quality; (v) Rule of Law; and (vi) Control ofCorruption. These indicators represent institutional features that are relevant to thetransaction costs of international trade. A considerable body of literature found thatcountries with stable and accountable political systems, less violence, and lesscorruption tend to have more efficient and more open economies (Acemoglu andRobinson, 2012). Regulatory quality has been proven to be an especially importantfactor for the entry of foreign companies (Helpman, Melitz and Rubinstein, 2008).
Rule of law represents a good measure of the quality of contracting institutions, andtherefore is a relevant determinant of the hold-up problems affecting international
trade and investment. This is especially important in the East Asian case, where thehigh-frequency trade of intermediary inputs dominates intra-regional trade (Kimura
and Ando, 2005).
The economics literature suggests that efficient credit allocation and a soundfinancial infrastructure are necessary requirements for industrialisation, and thus
trade and integration. To test this assumption, a financial development indicator wasconstructed by combining two values: domestic credit to the private sector, andexports and imports of financial services. The domestic credit score signifies thecapacity of the financial sector and has been used in previous studies to measurefinancial development (Beck, 2002; Becker et al., 2013). The exports and imports offinancial services measured in relation to GDP represent the international
embeddedness and competitiveness of the financial sector 6). Data was gathered fromthe World Bank World Development Indicators and national banks of regional states.
Infrastructure was measured across two variables. The first is primary energy
supply per capita. Energy supply is vital for industrial production and is one of the
major challenges facing low-income countries in attracting inward FDI. Data was
obtained from ESCAP and the US Energy Information Administration. The second
infrastructure variable is a combination of three components: landline phone
subscriptions, mobile phone subscriptions, and broadband internet subscriptions per
million persons. Data is from the World Bank World Development Indicators.
It should be noted that variable selection was in many cases ʻpath-dependantʼ
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due to scarce data availability, as relevant data was hard to obtain for the least
developed states of the region. In some cases, even more developed countries lacked
comparable time-series data for important infrastructural or institutional indicators.
Given that the aim of this study is to investigate long-term effects, the ability togather comparable time-series data for the longest period possible was prioritized.
The countries covered in the regression model were the sixteen countries taking
part in the RCEP negotiations, since this group represents the broadest
institutionalized form of East Asian regional integration. The data used in the gravity
model covered the years from 1996 to 2016, since these were the years were data on
domestic institutional quality was available from the World Bank. Additional data forthe gravity model were used from the datasets of Head and Mayer (2014) and
Gurevich and Herman (2018), and the UN COMTRADE database.
To investigate the effects of international institutions, additional variables wereused. First, in some specifications of the model, dummy variables were used tomeasure the effects of different FTAs. Second, to evaluate the quality of FTAs, avariable measuring the depth of FTAs was included as operationalized by Petri and
Plummer (2016). This variable is a numerical score which is based on the length of
the agreement text, the coverage of sub-issues (such as government procurement,
dispute settlement, IPR, etc.), and a WTO score, which shows how far an agreement
goes in liberalization. The reason for including this variable lies in the assumptionthat ʻdeeperʼ FTAs have a larger effect on trade. Finally, the effects of WTOmembership were measured with a dummy variable.
As mentioned above, FTAs can produce domestic reform, hence for the purposesof this paper it is important to distinguish FTA-induced reforms. In this dataset, theFTA scores treat this problem to a degree by differentiating between deeper andshallower FTAs. Second, neither the FTA dummies nor the FTA scores had asignificant effect on institutional quality according to regression checks, suggestingthat domestic reforms are not tied to FTA participation in the years and countries
covered.

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Domestic Institutional Quality as a Factor in East Asian Regionalization

3.2

The gravity model
To evaluate the effects of the variables on intra-regional trade, this study utilizes

three types of the gravity model of trade. First, we estimate the structural gravity
model with fixed effects as described by Anderson and van Wincoop (2003) andBaier and Bergstrand (2007). The basic model is:where pij xij is the bilateral trade value from country i to country j, Yi is the total
sales of country i, Ej is the total expenditure of country j, Y is the sum of sales in theworld, tij captures bilateral iceberg trade costs from country i to j, Pj is an inward
multilateral resistance term, ∏ i is an outward multilateral resistance term, and σ isthe elasticity of substitution. The model is estimated first using the following
equation, based on Yamanouchi (2019):

where X is the bilateral merchandise trade export value between country i and j
at time t; WTO is a dummy variable which takes the value of 1 if both countries are
WTO-members in a given year; δijB is a country-pair fixed effect and reflects all timeinvariant factors which affect the bilateral trade values; δitX is an exporter-time fixed
effect and reflects the production capacity of exporter, outward multilateral resistance,
and unilateral trade policies; and δjtM is an importer-time fixed effect and reflects thetotal expenditure of the importer, inward multilateral resistance, and unilateral trade
policies. The combination of the two country-year fixed effects controls for bilateralexchange rates.
The rest of the variables are those described above. FTAScore is the depth of the
trade agreements in place between country i and j in year t, as calculated by Petri and
Plummer (2016). To avoid having zero values, if there is no agreement in place
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between country i and j, the variable takes the value of 0.01. The FTAScore value isintroduced with a three-year lag after the implementation of an agreement. Although
Baier and Berstrand (2007) found that the trade creation effects of FTAs are
significant ten years after their inception, most East Asian FTAs are too recent toallow for a ten-year lag, therefore a shorter time-lag was used.
The Governance variable was constructed by taking the mean of the values ofthe six indices of the Worldwide Governance Indicators for a given country in a given
year. This variable was constructed on a country-pair level, since gravity models with
fixed effects cannot be used with country-specific variables (Baier and Bergstrand,2009). The same holds true for the rest of the variables: IT Infrastructure, Energy,
and Financial development, which represent data as specified in the previous section.
In all estimations, standard errors were robust and clustered by country pair. The
models were estimated using OLS.
For the sake of comparison, a second gravity model was calculated using theusual gravity variables instead of the country-pair fixed effects but retaining exportertime and importer-time fixed effects.

where Distance, Contiguity, Common Language, and Common Colonizer
represent the traditional gravity model variables used to measure bilateral ʻdistanceʼ
and thus serve the role which country-pair fixed effects serve in the previous model,
although with lesser predictive value. This model was estimated using OLS as well.
The results of the first two estimations are detailed in Table 1.

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Domestic Institutional Quality as a Factor in East Asian Regionalization
Table 1 Regression results of the first and second models
VARIABLES(1)
OLSln(Distance)

(2)
OLS

(3)
OLS

(4)
OLS

-0.729***(0.168)1.086***(0.249)0.808***(0.293)-0.0895(0.182)-1.150***(0.163)0.842***(0.298)0.506(0.351)0.00456(0.192)0.983***(0.115)0.756***(0.173)0.108(0.109)0.200(0.163)0.399**(0.191)2.648***(0.415)
1.155***(0.385)0.215***(0.0636)-0.0682(0.200)0.0512**(0.0211)-34.40***(4.127)
4,656
0.800
No
No
No
Yes

0.360***(0.117)0.270**(0.133)0.569**(0.269)0.0952**(0.0437)0.351*(0.182)0.0181*(0.00951)-1.654(1.753)0.676***(0.180)0.350(0.265)0.695**(0.351)
0.0588(0.0554)0.546***(0.206)0.0112(0.0286)
6.570**(2.722)-1.347***(0.163)0.748**(0.306)
0.191(0.357)-0.0223(0.216)
0.883***(0.111)0.269*(0.143)0.164(0.107)0.642***(0.139)0.584***(0.201)1.003**(0.387)2.291***(0.331)-0.104**(0.0477)0.504***(0.185)0.0572***(0.0215)-25.10***(3.554)

4,656
0.958
Yes
Yes
Yes

4,656
0.890
No
Yes
Yes

4,656
0.780
No
No
No

contiguity
Common colonizer
Common language
Exporter ln(GDP)Importer ln(GDP)Exporter ln(Population)
Importer ln(population)
WTO
FTA score
Governance
IT Infrastructure
Energy supply
Financial development
Constant

Observations
R-squared
Country-pair fixed effects
Importer-time fixed effects
Exporter-time fixed effects
Year fixed effects

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To investigate individual FTAs separately, an additional model was estimated,
where dummy variables represent the five ASEAN+1 FTAs: the Australia-NewZealand-ASEAN FTA (AANZFTA), China-ASEAN FTA, India-ASEAN FTA, JapanASEAN FTA/EPA, and South Korea-ASEAN FTA. Similarly to the FTAScore
variable, these dummies were introduced with a three-year lag. The model was
estimated with two specifications, one following the methodology of Ando and Urata(2015), with exporter-time and country-pair fixed effects, and one following themethodology of Yamanouchi (2019), where importer-time fixed effects were added.
The results are presented in Table 2.
Table 2 Regression results of the first model with FTAs included

VARIABLESWTO
AANZFTA
China-ASEAN FTA
India-ASEAN FTA
S. Korea-ASEAN FTAJapan-ASEAN EPA
Governance
IT Infrastructure
Energy supply
Financial development

272

(1)

(2)

OLS

OLS

0.366***

0.337***(0.117)(0.0996)-0.00193

0.0436(0.0863)(0.104)0.258*

0.363***(0.138)(0.126)

0.295*

0.626***(0.163)(0.226)0.224

0.0969(0.152)(0.172)0.162-0.143(0.106)(0.125)0.569**

0.525**(0.272)(0.225)

0.0930**0.123***(0.0437)(0.0381)0.341*

0.265**(0.181)(0.131)0.0179*0.00765(0.00956)(0.00893)

Domestic Institutional Quality as a Factor in East Asian Regionalization
Constant-1.5471.361(1.751)(1.218)Observations

4,656

4,656

R-squared

0.958

0.954

Country-pair fixed effects

Yes

Yes

Importer-time fixed effects

Yes

No

Exporter-time fixed effects

Yes

Yes

As mentioned above, the fixed effects model does not allow for the measurementof exporter- and importer-specific variables, as these would be absorbed by the fixed
effects. For this reason, a fourth model was used to measure the exporter- andimporter-specific effects of the institutional variables. For this model, a ʻsubstituteʼ
for fixed effects was used. Baier and Bergstrand (2009) suggest that the multilateralresistance terms introduced by Anderson and van Wincoop (2003) can beʻapproximatedʼ through observable trade costs. Following Baier and Bergstrand(2009), I used two approximations: one based on bilateral distance, and one on aremoteness variable as defined by Head and Mayer (2014). These variables wereconstructed according to the following equation and were calculated with the codesof Shepherd (2016, pp. 28-29).

Thus, the model was estimated as:

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specific fixed effects, but with country-pair fixed effects was estimated. Moreover, arandom effects model was used for additional comparison, since it has been suggested
that a random-effects regression accounts for unobserved heterogeneity, and yet
allows the inclusion of variables that would be collinear with the fixed effects(Shepherd, 2016, p. 28). Nevertheless, the usage of random effects for gravity
equations has not been theoretically developed, hence the results should be treatedwith caution. The results are presented in Table 3.
Table 3 Regression results of the third model

VARIABLES(1)
OLS

TRemoteness
TDistance
Exporter ln(GDP)Importer ln(GDP)Importer ln(Population)
Exporter ln(Population)
Importer Governance
Exporter Governance
Exporter IT Infrastructure
Importer IT Infrastructure
Exporter Energy supply
Importer Energy supply

(2)
OLS

(3)
OLS

(4)
OLS

0.695***(0.0943)
0.812***(0.0806)-0.0568(0.0357)
0.0454(0.0354)0.609***(0.217)-0.0716(0.252)0.00574*(0.00314)
8.54e-05(0.00314)
0.805***(0.164)0.208*(0.110)0.288(0.205)0.819***(0.167)-0.0279*(0.0149)
0.0157(0.0142)0.795***(0.242)0.154(0.288)0.00686**(0.00338)
0.00369(0.00369)
1.051***(0.224)0.310**(0.140)-0.569***(0.0756)-1.276***(0.251)-0.204(0.232)0.0499(0.219)0.725***(0.213)1.100***(0.231)1.138**(0.570)1.002**(0.507)0.00795(0.00662)
0.00825(0.00613)
1.359***(0.284)0.590**(0.245)274

0.812***(0.0602)0.949***(0.0635)
1.973***(0.528)1.650***(0.431)-0.0117*(0.00702)-0.00997(0.00695)
1.289***(0.201)0.759***(0.167)Domestic Institutional Quality as a Factor in East Asian Regionalization
Exporter Financial dev.
Importer Financial dev.
Constant

Observations
R-squared
Country-pair fixed effects
Bilateral trade cost approximations
Random effects

40.683***(0.258)0.578**(0.227)-23.82***(5.230)0.546**(0.257)0.495**(0.227)-21.93***(1.539)0.00806(0.0987)
0.210**(0.0870)-41.81***(2.741)-0.00590(0.101)0.203**(0.0906)-37.90***(4.132)

4,656
0.729
No
Yes
No

4,656
0.735
No
Yes
No

4,656

4,656
0.949
Yes
No
No

No
No
Yes

Estimation results and discussion
The results show that in all specifications, the quality of governance and WTO-

membership are significant determinants of trade. Quality of governance consistently
has the highest coeﬃcient among the variables, confirming the hypothesis.
One exception is that when the exporter- and importer-specific variables are
estimated in a model with country-pair fixed effects or random effects, only theimporter-side governance variable is significant, while the exporter side variable isnot. This is contrary to expectations: domestic institutional quality is usually
discussed in the context of industrialization; hence it is expected to have a stronger
significance on the exporter side. On the other hand, it can be considered that
institutional quality goes hand in hand with economic openness, hence countries with
better institutions might be more open to imports. In any case, given the weaknessesof the random-effects model, the importance of these exceptions is meagre.
Coeﬃcients for WTO-membership are significant across all the specifications.
With fixed effects, the WTO dummy is stronger than the FTA score and all FTA
dummies except for one. This validates the argument that WTO-membership has
been an important factor in East Asian trade-creation.
The significance of exogenous variables is weaker. Energy supply is significant
and has a high coefficient in most specifications, but weak when measured in the
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自由論題

model with the strongest predictive value, with exporter-time, importer-time, andcountry-pair fixed effects. IT infrastructure has a meagre and often insignificant
effect. Financial development is strong and significant when the country-specificvariables are measured separately, but weak in fixed effects models. It is likely thatthe weakness of these indicators stem from the fact that differences in ITC attainment
and financial development between countries are more nuanced than what could be
estimated with the crude comparative data available, and hence their effects areunderstated in this model.
In fact, Baldwin (2016) posits that global trade and the structure of the world
economy are ultimately determined by the costs of moving goods, services, knowhow, and people; which are, in the scope of this study, exogenous factors. According
to this view, nations are no longer the natural unit of analysis in determining
international competitiveness, since the fragmentation of production and theconcentration of knowledge within MNEs decreases their ability to influence
outcomes through traditional development policies. This paper uses a more traditional
understanding of the international economy with a more favourable view of state
capacity, but it should be noted that to more thoroughly investigate such trends, amore advanced analytic toolkit shall be developed.
Among the FTAs, only the China-ASEAN and the India-ASEAN agreements
are significant in this model. This might mean on the one hand that the FTAs of
ASEAN with developed countries are highly heterogenous, which is not inconsistent
with previous research (Ando and Urata, 2015; Yamanouchi, 2019). On the other
hand, this result suggests that in the case of the ASEAN, due to its diversity, even lessambitious FTAs might be effective in raising trade values: even though the ChinaASEAN and the India-ASEAN agreements are of lower quality than the JapanASEAN EPA, they still create new trade flows among previously relatively closed
economies. This in line with the finding of Baier, Bergstrand, and Clance (2018), that
FTAs have higher effects for countries with lower per capita GDP.
Apart from heterogeneity, another possibility which has not been explored hereis endogeneity: in the case of the Japan-ASEAN EPA and the South Korea-ASEAN

276

Domestic Institutional Quality as a Factor in East Asian Regionalization

FTA, considerable trade and production networking activity had preceded theimplementation of the FTA, and Japan had already conducted a number of bilateraltreaties with individual ASEAN members. Thus, one can hypothesise that theASEAN-Japan EPA and the South Korea-Japan FTA have institutionalised trade ties
which had already existed. Moreover, the young age of regional FTAs must be
considered: it is possible that not enough time has passed since their implementation,and their trade-creation effects will grow over time.
When it comes to the depth of FTAs, the FTA score variable is significant inthree models out of four, yet loses its significance when time-invariant unobservable
trade costs (country-pair fixed effects) are dropped. The FTAScore variable is weaker
than the WTO dummy in the models, likely as a result of overall weak FTA depth in
the treaties surveyed.
It should be noted that the regional institutional architecture is currently
undergoing momentous changes which are not captured in this study. The first ofthese is the conclusion of the CPTPP. This treaty was to be adopted under theleadership of the United States as the Trans-Pacific Partnership among twelve Pacificstates, including seven ASEAN Plus Six members. However, after the election of theprotectionist Donald J. Trump as president of the US, Washington left the agreement.
A somewhat weaker form of the TPP was signed in March 2018 as CPTPP by the restof the participants and came into effect on 30 December 2018 among six countries
which ratified it 7). The CPTPP covers a dearth of WTO+ and WTO-X issues such ascompetition policy, widespread investment liberalization, intellectual property rights,
and other forms of regulatory convergence (see Table 4). Therefore, it is described asa high quality 21st century free trade regime which establishes new benchmarks forinternational trade and investment rules and requires deep domestic reforms(Watanabe, 2016).

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自由論題
Table 4 The coverage of CPTPP and RCEP

CPTPP

RCEP

WTO

Trade in goods

O

O

O

Trade remedies

O

O

O

Trade facilitation

O

O

O

Technical barriers to trade

O

O

O

Sanitary and phytosanitary measures

O

O

O

Trade in services

O

O

O

Investment

O

O

*

Intellectual property

O

O

O

Competition policy

O

O

X

State-owned enterprises

O

O

X

EcommerceO*

X

Government procurement

O

X

*

Environment

O

X

X

Labor

O

X

X

Dispute settlement

O

O

O

Cross-cutting issues

O

X

X

Standards, regulatory cooperation

X

X

X

Source: JETRO (2015)

The RCEP also goes beyond the WTO and ASEAN+ FTAs in its coverage but ismuch less ambitious in liberalization and rule-setting than the CPTPP, as a substantial
part of its membership is made up of less advanced economies (Chia, 2015). The
status of the RCEP is unclear as of March 2020, after India decided to step awayfrom the table due to its reluctance to open its markets.
While it is beyond the scope of this paper to analyse these undertakings in detail,it should be highlighted that the wider adoption of CPTPP would result in significant
FTA-induced domestic reforms, which would create favourable conditions fordurable trade-creation and integration in the region and beyond. While it is lessambitious, the same holds true for the RCEP, which would provide more gradualliberalization in the case of a number of low income, closed ASEAN countries, and278

Domestic Institutional Quality as a Factor in East Asian Regionalization

therefore would open new markets and opportunities for production relocation,
provided that these countries (see Chia, 2015).
Finally, an important limitation should be noted when interpreting the results.
The dataset contains data only for the ASEAN Plus Six, and no data for the rest of
the world, as our goal was to discern the effects of institutional variables on East
Asian intra-regional trade. Accordingly, variations across countries and across timecome only from the variations among these sixteen countries. The discussion
presented here is only valid for the determinants of trade among these economies anddo not explain extra-regional effects.

5Conclusion
This paper aimed to estimate how and to which degree did domestic institutional

quality, and the changes thereof, influence international trade within the ASEAN Plus
Six. The expectation was to find a significant effect, based on the hypothesis that East
Asian nations follow trade-based development policies and therefore instituted
domestic institutional reform to be able to participate in regional trade. The
hypothesis was tested through various specifications of the gravity model of trade andthe empirical analysis positively confirmed the hypothesis.
Taken in its entirety, the empirical model lines up with the theory-based andhistorically inferred arguments presented in the second section of the paper. Whileboth domestic, regional and global factors contributed to the expansion of East Asian
regional trade, domestic institutional quality had the highest coefficient in theseestimations, consistent along the different specifications. WTO-membership remains
equally important in providing rules, regulation and stability to regional commerce.
This is not surprising, since East Asian regionalization is deeply embedded into
globalization. On the regional level, progress has been heterogenous, which is notinconsistent with recent research.
The results of these estimations imply that domestic institutional reforms remainof paramount importance for East Asian trade and economic development. One
implication of this is that the low- and middle-income economies of the region should
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自由論題

press on with institutional reforms so as to be able to continue on their current
development paths, especially as globalization is moving from physical forms oftrade to nonphysical and more knowledge-intensive ones. A second implication iswhen it comes to regional institutions, those which promote market reforms andregulatory reforms, such as the CPTPP, would provide larger and more lasting tradecreation effects, while less ambitious institutions, such as the RCEP, would be lessdurable and effective. However, the regionʼs heterogeneity means that for the least
advanced economies of East Asia, the less ambitious and ʻmore flexibleʼ RCEP-type
agreements may provide ample benefits and motivations for reform as well.
Research on the effects of domestic institutional quality and domestic
institutional change on regional trade is relatively scarce, especially in the case of
East Asia. This paper aimed to contribute to the discourse by introducing new
variables and estimating them in a number of specifications, albeit with a lessambitious scope than some of the previous, more general papers (Nunn and Trefler,2014). To attain more robust results, future research shall involve a larger dataset andimproved control variables especially in the case of infrastructure and ICT
attainment.
Endnotes
1)

2)
3)
4)
5)
6)

The RCEP involves the member countries of the ASEAN Plus Six framework, namely
Australia, Brunei, Cambodia, China, India, Indonesia, Japan, Laos, Malaysia, Myanmar,
New Zealand, Philippines, Singapore, South Korea, Thailand, Vietnam. India decided tosuspend its participation in the RCEP negotiations in late 2019.
Institutions are understood here broadly, “as the rules of the game”, or “the set of rules in asociety,” which “are key in the determination of transaction costs,” as formulated by North(1992, p.5-10).
The NAFTA was renegotiated as the Agreement between the United States of America, theUnited Mexican States, and Canada (USMCA), which is due to enter into force in 2020.
A related argument explains East Asian regionalization through the concept of informal
governance networks made up of sub-state actors which are involved in transnational
activities. (Katzenstein and Shiraishi 1997)
For example, the rule of law and regulatory quality in Vietnam began to improve in theearly 2010s. Laos stagnated even though it is participant to ASEAN FTAs. Chinaʼs values
are highly heterogenous, but the improvements occurred mostly after 2010.
Since I am using merchandise trade data as the dependent variable, the inclusion of280

Domestic Institutional Quality as a Factor in East Asian Regionalization

7)

services data on the other side of the equation does not interfere with it.
The current membership of the CPTPP include Japan, Mexico, Singapore, New Zealand,
Canada, Australia and Vietnam. Chile, Brunei, Peru and Malaysia are also signatories, but
are yet to ratify the treaty as of March 2020.

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〔受付日 2019. 11. 29〕〔採録日 2020. 5. 29〕

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