# **Partners or Predators? The Impact of Regional Trade Liberalization on Indonesia***

## **1. Introduction**

After two decades of relatively modest progress in the area of multilateral trade liberalization and regional trading arrangements, the last few years have witnessed a near stampede. In addition to the muchheralded conclusion of the Uruguay Round Agreement in late 1994, nearly every region of the world has established a bewildering and in some respects conflicting range of preferential trade or integration initiatives. Latin American economies have responded to implementation of NAFTA with a combination of lobbying efforts to gain similar access through NAFTA accession as well as a range of new or revitalized competing regional agreements, from the Pacto Andino in the north to Mercosur in the south. Eastern European economies scramble to affiliate with the EU, which in turn worries about whether it is preferable to "deepen" before it "broadens". Australia and New Zealand pursue implementation of their Close Economic Relation, and economies in southern Africa contemplate regional initiatives that revolve around the central role played by South Africa, emerging from isolation after almost two decades of confrontation with its neighbors.

Within East Asia, competing forces are also apparent. The commitment made in Bogor in November 1994 by the APEC countries to create an APEC free trade area by the year 2020 represents only the most recent regional integration initiative. Reconsideration of the potential role for the ASEAN group has been underway for some years, with pressures for expansion to potential new members (such as Vietnam) competing with the belief that the existing grouping needs to broaden its scope from traditional concerns with politics and security to economic issues. Several years ago plans were developed for an ASEAN Free Trade Area (AFTA) that would reduce tariffs on most products to a maximum of 5 percent among members by 2008. The pressure of events resulted in an ASEAN decision to broaden the scope and accelerate the timetable, with major reforms due to be completed by 2003.

This trend towards regional integration and liberalization represents an important shift in international policy. Only a decade ago, the conventional wisdom was that the scope for successful regional free trade initiatives was relatively limited, a conclusion supported by an intemational landscape littered with attempts that had fallen short of their original lofty goals. But any conclusion that this trend represents the final triumph of free trade doctrines over insularity and protectionism must be viewed with suspicion. Many recent initiatives seem motivated more by fear of being left behind by one's competitors than by any conviction that the benefits of liberalization or greater integration outweigh the costs. The proliferation of regional agreements has also raised concerns that the world trading system will separate into exclusive blocks. ' NAFTA has set off a scramble in the Westem Hemisphere among those not yet included, and has ' The authors acknowledge the assistance of Tom Hertel, Glenn Harrison, Will Martin, and Zhi Wang in preparing the data used in the paper.

' Hughes Hallett and Primo Braga (1994) assess the implications of increased regionalism on progress towards a more liberal trade order, and conclude that regional arrangements are unlikely to work as building blocs towards a 'perfect' GATT. Instead, they argue that the best approach for developing countries threatened by the growing strength of regional arrangements is to encourage and strengthen the multilateral trade system, particularly the emerging WTO. Empirical work to date on the implications of regional arrangements does not, however, support this pessimistic view of their impact.

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