INTRODUCTION

The Pacific Basin is the most robust economic region of the world. More than half the world's population resides in countries bordering on it, and this region's average economic growth rate has been double that of the rest of the world since 1970. The volume of trade on the Pacific is three times that on the Atlantic and has been growing twice as fast. In less than a generation, this region has become the global pacesetter for market-based economic development and a model of efficient international specialization. This volume examines a number of leading issues facing the Pacific Basin and collects the research and opinions of experts from around the region on its economic prospects into the next generation. In particular, some authors examine the received history of trade rivalry and the new initiatives for regional cooperation in trade. Other authors examine Pacific multilateralism from the capital account perspective, detailing a complex web of foreign direct investment linkages that now pervade the region. Finally, two chapters examine an important emergent issue in the region and the world - links between trade, sustainable resource use, and the environment. Taken together, these studies cover issues of the highest priority for policy dialogue and research, in this region and in the context of multilateralism generally, now and for the foreseeable future.

As we enter the Pacific Century, an unprecedented set of promises and challenges lies ahead. Can a new global paradigm of market-based, open multilateralism provide the economic momentum to lift over one-quarter of humankind out of poverty at last? Can such a complex mosaic of trading economies also provide a basis for sustained cooperation, peace, and political stability?

TOWARD A FREE TRADE AGREEMENT IN EAST ASIA OR THE PACIFIC BASIN?

During the past quarter-century, intraregional trade has expanded dramatically in East Asia and the Pacific Basin. In 1970, 29.8 percent of gross trade (the sum of exports and imports) was intraregional among ten selected countries in East Asia -Japan, China, the newly industrialized economies (NIEs: South Korea, Taiwan, Hong Kong, and Singapore), and the ASEAN-4 (Malaysia, Thailand, Indonesia, and the Philippines). By 1995, intra-East Asian trade accounted for 49.2 percent of gross trade flows. Similarly, intraregional trade among the countries of Pacific Basin – the ten East Asian countries, along with the United States, Canada, Mexico, Australia, and New Zealand - climbed from 58.4 percent in 1970 to 72.1 percent in 1995. Emerging in tandem with the formation of the European Union (EU) in 1992, this expansion in intraregional trade led many analysts to ponder the possibility of an East Asian or a Pacific free trade agreement.

While much has been written about the significance of expanded intraregional trade flows in East Asia and the Pacific Basin (e.g., Drysdale and Garnaut, 1993; Frankel, 1993; Krugman, 1991; Petri, 1993; Saxonhouse, 1993; Yamazawa, 1992, 1994), considerably less attention has been paid to the political feasibility and the economic benefits and costs of such. Is an East Asian free trade area (EAFTA) agreement politically feasible? What about a Pacific free trade area (PAFTA)? How likely is it that the governments of the various countries of the region can successfully negotiate an agreement establishing a free trade area?

INTRODUCTION

The primary strategic challenge for trade policymakers is managing a continuously shifting pattern of trading opportunities. Apart from notable exceptions such as GATT (General Agreement on Tariffs and Trade) and an increasing number of regional trade accords, most of this policy is formulated and implemented unilaterally and with narrowly defined national interests. In this chapter, we argue that there exist cooperative trade strategies that can serve the domestic political agendas of national policymakers and can facilitate, rather than impede, the evolution of a trading system based on efficient international resource allocation. A larger set of cooperative solutions for policymakers would do much to foster the continued growth of the world economy and world incomes.

Trade between the United States and Japan has evolved dramatically over the last three decades, growing from a trickle to one of the world's largest bilateral trade flows. During the same period, the roles of the two countries in the world economy have also changed as new patterns of comparative advantage have developed between them and their trading partners. The United States has maintained prominence as an agricultural exporter and expanded service exports as a share of its total trade, but its leadership in a variety of manufacturing exports has been lost or seriously challenged as East Asian economies have aggressively developed new market niches in textiles, metal products, and consumer electronics.

Meanwhile, the Japanese economy experienced an unprecedented period of economic growth during 1955–73 and strong sustained growth during 1976–90, followed by a recession and slow recovery during 1992–97. The robust expansion of Japanese exports during 1955–90 was accompanied by extensive shifts in its underlying composition.

Introduction

The environmental implications of international trade are becoming an important part of multilateral and domestic policy agendas. This is particularly the case for trade relations between developing and developed countries. To what extent developing countries should devote their resources to lowering domestic environmental costs for their own welfare and that of the world as a whole has frequently been debated. The debate stems from the widely held view that a tradeoff between economic growth and environmental quality exists. Many policymakers in developing countries argue that they have the right to pursue the same material aspirations by the same means as did the industrialized world during its developmental stages and are thus willing to spend smaller percentages of their productive resources for pollution abatement than developed countries.

If it is accepted that differing domestic practices yield different environmental effects, how might trade exert its own environmental influence? It is increasingly recognized that the import of goods and services entails an implicit transfer of environmental effects to the exporting country. Given the hierarchical nature of technology in the development process, one might infer that less developed countries would be net losers in the environmental transfer scheme which underlies trade. The data presented in this chapter indicate that trade between Indonesia and Japan has occasioned a large and sustained net transfer of effluents during the 1965–90 period. For example, the implied unit effluent content of Indonesian exports to Japan has been about six times that of its imports from Japan.