INTRODUCTION

In the last five years, the mega-regional trade agreements of the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP) have caught the fancy of many countries across the Asia-Pacific region. In addition, the Transatlantic Trade and Investment Partnership (TTIP) is also being negotiated and the Pacific Alliance (PA) is being formed, in order to align their participating members with the forces of globalization and hence benefit from the Asia-Pacific's emerging regional agreements.

While the prognosis on these mega-regional deals is unclear at this juncture, it is certain that they will shape the global trade architecture of the twenty-first century — particularly the RCEP and the TPP — because of their sheer size and scope, covering issues that go beyond trade liberalization. However, it has been and will be difficult to first conclude the negotiations and thereafter to implement these mega-regionals as they are bound to face complex challenges. Though the broad text of the TPP has been agreed by the twelve member nations, its full ratification is expected to take sometime. The RCEP process has been slow since the beginning of its journey in May 2013, and missed the deadline of end 2015, as promised earlier.

This overview chapter looks at the literature on Regional Trade Agreements (RTAs), followed by a discussion on the role of RCEP and TPP, covering both economic and strategic aspects, in the bigger geography of the Asia-Pacific region. The chapter, thereafter, provides a short narrative of what is to be expected from the rest of the book. In the final section, it pulls strands from the subsequent chapters to give a flavour of where the future of the global trade environment could be headed.

LITERATURE REVIEW

The post-Cold War proliferation of Free Trade Agreements (FTAs) — a form of new regionalism — has gained prominence as countries struggle to balance the challenge of globalization against domestic interests. The General Agreement on Tariffs and Trade (GATT) received 123 RTA notifications from 1948 to 1994, while the World Trade Organization (WTO) has received notifications for over 300 additional arrangements covering trade in goods and/or services since its inception in 1995.

INTRODUCTION

Interdependence among countries has increased substantially since the end of World War II. The main force behind this growing interdependence is international trade. Indeed, it is the rapid expansion in world trade, resulting largely from liberalization of manufacturing trade, that has led to substantial growth of the world economy. In recent years, however, foreign direct investment (FDI) has become a major contributor to deepening interdependence among countries. Between 1980 and 1996, world FDI grew at an annual average rate of 12.6 percent, significantly higher than the corresponding growth rate of 6.5 percent for world trade (both in nominal terms).

Rapid FDI expansion has given rise to an important and interesting question regarding the relationship between FDI and international trade. Does international trade promote or discourage FDI? Does FDI facilitate or restrict international trade? These questions concern whether FDI and trade are complements or substitutes (i.e., whether they exert positive or negative influences on each other).

Theoretically, FDI and trade can be either complements or substitutes. Within the framework of the Heckscher-Ohlin (H-O) model, Mundell (1957) showed that FDI and trade are perfect substitutes; in other words, trade reduces incentives for FDI and vice versa. In contrast, by relaxing the assumptions used in the H-O model, Markusen (1983) obtained a case where FDI and trade can be complements. Specifically, he demonstrated that FDI expands trade when trade is induced by non-H-O factors, such as differences in technologies between trading partners. A crucial determinant of this relationship is whether FDI is undertaken in an export industry or import-competing industry in the host country.