eager to submit unconditionally to global US leadership ineconomic and financial affairs. Japan’s motivation behind regional initiativeswas partly defensive. It was apprehensive that development of the euro mighteventually push the world into a two-currency bloc, squeezing the yen out ofthe global currency markets. If that led Japan to play a more effective andconstructive role of its own in Asia, it was a healthy development for theregion. Being the largest regional economy, and the second largest globaleconomy, Japan is aptly suited to play a long-term lead role in Asia andcontribute to regional economic and financial stability.8.1 ‘New Age’ Bilateral FTA: Japan and SingaporeA desirability and feasibility study of a Japan–Singapore FTA was underwayduring 1999 and 2000 (JSG, 2000a; JSG 2000b).46 The principal objective ofthis bilateral FTA was to (1) liberalize trade further by reduction of tariffs andelimination of NTBs, (2) liberalize trade in services, and (3) adopt tradefacilitation measures like mutual recognition of national standards, streamlining of customs procedures, and establishment of an ‘exemplary framework
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for FDI’. The two prospective partners also envisaged collaboration on issueslike intellectual property rights, education and training, media andbroadcasting, and promoting mutual tourism. This bilateral ‘new age’ FTA isconsidered a pioneering one and was being closely watched by the other largetrading economies in the Asia-Pacific region.47 Closely on the heels of theJoint Study Group between Japan and Singapore, another identical studygroup was set up to study the feasibility of a Japan–Korea bilateral FTA(KIEP, 2000).Hertel et al. (2002) calculated Japan’s total merchandise trade bias towardsKorea, Singapore and the rest of the world. They used this method to capturethe determinants of export shares, taking into account the size, the opennessand product composition of the importing markets. The bias component offersa kind of proxy for the transaction costs that an FTA is intended to lower. Thehigher the bias, the more attractive the export destination the partner economywould be relative to the rest of the world. They found that over the precedingthree decades attractiveness of exporting from Japan to South Korea andSingapore has been cut into half. Likewise, export bias from Korea andSingapore towards Japan has also been falling steadily. While trading costsbetween Japan and these two regional economies has fallen significantly overthe last three decades, they fell more between Japan and its other tradingpartners.The Japan–Singapore FTA aims at eliminating bilateral tariffs. Food andagricultural products are exported from Singapore to Japan by entrepôtexporters. These are sensitive products and given the high tariffs on themwhen imported from other destinations, the incentive for trans-shipmentthrough Singapore is likely to be high when the FTA comes into force. Theprospects of enforcement costs associated with rules of origin in the FTA arelikely to be high. Therefore, it is likely that agriculture would be finally leftout of this FTA, or perhaps included after a long delay. Textiles and appareland leather goods also face non-negligible tariffs in Japan. Under the FTA,substantial expansion in the export of these products would take place.The trade relationship in terms of products is highly skewed. Japaneseexports to Singapore are highly concentrated in machinery and equipmentsectors, followed by business and financial services, petrochemicals,mineral products and other extractive manufactures, in that order. Similarly,Singapore’s exports to Japan are highly concentrated in financial services,followed by machinery and equipment sectors, petrochemicals and mineralproducts, in that order. Bilateral trade between the two economies is based ona great deal of intra-industry trade in machinery and equipment sectors, whichis likely to receive a substantial impetus under the FTA.Another objective of a Japan–Singapore FTA is trade facilitation bylowering customs clearance costs, so that bilateral costs of trade could be
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lowered. The two study group reports (JSG, 2000a, 2000b) cited a UnitedNations Conference on Trade and Development (UNCTAD) study thatconcluded that customs paperwork and procedure costs add up to 7 percent ofglobal value added in international trade, which may be correct on an averagebut seems high for Japan–Singapore trade. However, in a period of increasedregional cooperation and vertical production integration in industries, smallincreases in trade costs have a good deal of negative impact over intra-industrytrade. Any trade cost on this count, which is higher than 1 to 2 percent, wouldamount to a substantial barrier to trade, akin to industrial tariffs. Therefore, theJoint Study Group proposed reduction in customs clearance costs through theimplementation of the Electronic Trade Documentation Exchange System(ETDES). It was believed that ETDES would not only increase the pace ofcustoms clearance but also quicken the exchange of documents. Anelectronically harmonized customs system would reduce the time and cost ofpaperwork, processing and shipment. While Singapore presently uses ETDES,Japan needs to install it.Using a dynamic GTAP (Global Trade Analysis Project) model for theproposed FTA, Hertel et al. (2002) concluded that the impact of this bilateralFTA on investment, capital accumulation and economic growth would besignificant. This conclusion applies more to Singapore than to Japan. Inaddition, they concluded that global benefits were to be substantial. They werequantified at $9.5 billion per year by 2020. As regards the distribution ofgains between the two FTA partners, 70 percent are likely to be capturedby Japan because a greater part of the FTA related reforms would beundertaken by Japan. This study found that there is a strong probability oftrade diversion, leading to losses to the several non-participating regions of theworld.8.2 Bilateral FTA between Singapore and the United StatesThe United States and Singapore have successfully finalized a Free TradeAgreement that will result in greater trade liberalization between the twocountries. The US is Singapore’s second largest market. The Agreement,which was signed on 6 May 2003 in Washington DC, was approved by the USHouse of Representatives on 25 July 2003 and by the Senate on 1 August2003. Ambitious and comprehensive, the Singapore–United States Free TradeArea (SUSFTA) covers trade in goods and services and is ‘consistent withArticle XXIV of GATT 1994 and Article V of GATS’.48 Both the partnershave agreed to go much above their WTO commitments. It will also beNAFTA-plus in a number of areas, including the protection of intellectualproperty, the inclusion of e-commerce and ICT services, together withadvanced rules of origin and customs cooperation. As the first free trade
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agreement to be concluded between the US and an Asian country, theSUSFTA will cement the already strong economic ties between Singapore andthe US. It will also serve as a catalyst towards deeper US economicengagement in the region and spur other ASEAN-wide FTAs.The principal objective of the trade liberalization efforts involves thereduction and eventual elimination of tariff for merchandise goods. In theSUSFTA, up to 92 percent of Singapore’s exports to the US49 and 100 percentof US exports to Singapore would enjoy the preferential tariff treatment oncethe FTA goes into force. In addition, Singapore companies will also benefitfrom the waiver of the 0.21 percent Merchandise Processing Fee (approximately $30 million) and the Vessel Repair Duty (approximately $4 million ayear) in the SUSFTA. However, it should be noted that both countries alreadyhave very liberal trade policies. Singapore has virtually zero tariffs (except forbeer, stout, samshoo and medicated samshoo) and the US has an average tariffrate of 0 percent to 5 percent on merchandise goods.With such low levels of protection, the degree of tariff reduction cannot besignificant.50 Therefore, the impact of trade liberalization in merchandisegoods alone between these two open economies is likely to be modest. Incontrast to this, liberalization of trade in services is expected to benefit boththe economies substantially because the services sector is the largest in boththe economies and its contribution to GDP is 65 percent or more. Therefore,improved access in the services sector is sure to benefit the two partnereconomies in terms of improvement in productivity and competitiveness.In an aggressive burst of purposeful activity Singapore completed bilateralFTAs with New Zealand in November 2000, the European Free TradeAssociation in January 2003 and Australia in July 2003. (At present, EFTAcomprises Iceland, Liechtenstein and Switzerland.)
9. CONCLUSIONS AND SUMMARYNotwithstanding the fact that the approximately half of the trade is intraregional, the Asia-Pacific region was late in adopting regionalism in itsinstitutional form. Several sub-groups of Asian economies grew highlysuccessful by following export-led or trade-induced growth. These sub-groupsincluded NIAEs, followed by the ASEAN-4 and subsequently China. Themarket expansion and regional integration that took place in Asia was bothvertical and horizontal. First the NIAEs and then the other emerging-marketeconomies of Asia developed tiers of complex trade and manufacturinghierarchies. This occurred in association with the large flows of intra-regionalinvestment into Southeast Asia and China. Over the preceding quarter century,Japan, Taiwan and Korea provided massive amounts of FDI to Southeast
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Asian economies and China, and in the process increased their commitmentsin these markets.Intra-trade in Asia has been well developed since the beginning of thetwentieth century. During the early decades, it was close to half the total tradein Asia, which was dominated by Japan’s colonial pattern of economicrelations. After 1931, the Japanese colonial pattern of trade gave way tobuilding independent industrial capacity outside Japan, essentially in China,Korea and Taiwan. This kind of economic relationship between Japan andother Asian economies led to significant intra-regional investment as well asdevelopment of regional transportation and communications infrastructurenetworks. Over the post-war period, development of Asian productionnetworks supported mutually reinforcing trade and investment. The result wasthe creation of complex regional economic ties among these economies aswell as trade dependencies. The increasing trade dependence of Asia is clearlyreflected in a simple measure, namely, intra-regional trade as a share of totaltrade of the region.During the 1970s, a triangular production relationship had developedbetween Japan, the NIAEs and the US, bringing the former two sets ofeconomies closer together. Japan supplied the necessary components andtechnology to the NIAEs, which in turn produced and competitively marketedindustrial products to the US market. After the Plaza Accord in 1985, thecurrency value configuration changed. The dollar had reached a high againstthe yen in early 1985, which intensified imports from East and Southeast Asiainto the US market, and Japan was able to maintain its exports even as itsproduction costs were rising vis-à-vis its Asian rivals. Changes in currencyvalue configuration and economic complementaries buttressed this trend.Gradually the production locus shifted from firms to networks of regionalproduction. Asian economies were pioneers in this respect. Productionnetworks soon became a significant force driving the process of economicintegration in East and Southeast Asia as well as that of globalization. Duringthe late 1980s, the production networks began to spread to Guangdong andFujian provinces in south China, and a borderless economy encompassing amuch larger region with different comparative advantages began to emerge.Although there is some disagreement regarding the concept of naturaltrading partners, Asian economies have not only integrated as natural tradingpartners, but the prospects for monetary integration among them are alsoimproving. Evidence is available to show that trade and investment diversiondue to formation of RIAs around the globe would cause the Asia-Pacificeconomies to lose out on some of their export markets and FDI. Also, a goodnumber of empirical studies, using the gravity model, lead towards two broadconclusions. First, East and Southeast Asian economies clearly show a certaininward bias among themselves. Second, even after controlling for a special
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Asia effect, East and Southeast Asian economies en masse appear to trademore among themselves than one would expect based on their economic andgeographic characteristics.Asian-Pacific economies did not display as much enthusiasm for RIAs asthose in the EU and Latin America, nor did formal regional tradingarrangements that were entered into, go very far. Despite this general trend inregional cooperation and integration, there are several areas in Asia wheresub-regional cooperation is taking place. These regional cooperationendeavors have been christened the ‘growth triangles’. In their most basicform they exploit complementarities between geographically contiguous areasof different Asian countries to gain a competitive edge in export promotion.To be effective, they require close cooperation between the private and publicsectors of each of the countries involved.At beginning of the twenty-first century, proclivity towards regionalism inAsia began to strengthen. Led by Singapore, political leadership in Asia grewincreasingly inclined towards it. There were fervent calls to take advantage ofnew opportunities and meet unprecedented economic challenges. To this end,it was felt that Asian economies needed to work in a proactive manner towardsregionalism. Although there are not many RIAs in the Asia-Pacific region, theexisting ones do show an impressive variety in their range. In a chronologicalorder, they include Australia–New Zealand Closer Economic Relations(ANZ-CER or only CER) agreement, ASEAN Free Trade Area (AFTA),APEC, and SAARC Preferential Trade Area (SAPTA). The history, motivation and objectives of these RIAs vary widely. Of these, only CER and AFTAcan be treated as integrated RIAs. Of the others, some are formal, others arenot. Some are successful, others are there only in name and merely facilitatetrade. Some are more than a decade old, while others are little more than aconcept. During 2000, there was a new fervor of New Age bilateral FTAsin Asia. The Japan–Singapore FTA is considered a pioneer, while aSingapore–China FTA is being prepared.
NOTES1. Unless otherwise specified, ‘Asian’ in this chapter implies East and Southeast Asianeconomies, while ‘Asia-Pacific’ means Asia plus Oceania.2. Based on real GDP growth and other usual indicators of economic performance during thelast three decades, the East and Southeast Asian economies and the People’s Republic ofChina (or China) are widely regarded as the dynamic economies of Asia. Economists tendto separate ‘dynamic’ Asia from the rest of Asia.3. Hong Kong SAR, South Korea, Singapore and Taiwan.4. Namely, Indonesia, Malaysia, the Philippines, and Thailand.5. The source of GDP growth statistics is IMF (2003), Table 1.1.6. The source of these are the trade statistics published on the WTO website. Referto International Trade Statistics 2002, at http://www.wto.org/english/res_e/statis_e/statis_e.htm.
1687.8.9.10.11.12.13.14.15.
16.17.18.19.20.
21.22.23.
Regionalism in global tradeReported in the Annual Report 2002, of the World Trade Organization. See Appendix TableII.1, p.22.Although Macao should be added to this definition of Greater China, conventionally it is not.Refer to Chapter 4 of ‘Regional Integration in East Asia: Challenges and Opportunities’ byE. Sakakibara, and S. Yamakawa, Part II, Keio University, Tokyo, June (2003) p.5.For greater details regarding the achievement of stability, please refer to Ikenberry (2000),WTO (1995) and WTO (1999).The five crisis-affected Asian economies were Korea, Indonesia, Malaysia, the Philippinesand Thailand.The eleven member central banks or monetary authorities are those from Indonesia, Korea,Malaysia, Mongolia, Myanmar, Nepal, the Philippines, Singapore, Sri Lanka, Taiwan, andThailand.The central banks and monetary authorities that participated in EMEAP were those fromAustralia, China, Hong Kong SAR, Indonesia, Japan, South Korea, Malaysia, New Zealand,Philippines, Singapore, and Thailand.The ASEAN-Plus-Three grouping comprises the members of ASEAN, China, South Koreaand Japan.On 22 September 1895, the Group of Five (G-5) finance ministers and central bankersmet at the Plaza Hotel in New York to accord recognition to the view that ‘recent shiftin fundamental economic conditions … together with policy commitments for thefuture’ had to be fully reflected in foreign exchange markets. The communiqué declared thatin the international economic milieu ‘some further orderly appreciation of the main nondollar currencies is desirable’ and that an exchange rate policy should play a role in place oflaissez faire. The accord communiqué called for the appreciation of the yen and the deutschemark, instead of the depreciation of the dollar. The Plaza communiqué had a substantialshort-term impact over the foreign exchange markets and the dollar went into a steepdecline, while the yen and deutsche mark began to appreciate, the former sharply (Das,1993).Chapter 4 in Das (1996) presents a detailed account of the new division of labor anddevelopment of regional and sub-regional production networks in Asia.The World Trade Organization, Trade Statistics, Table III.3, July 2003.Refer to Table 2.1, in Frankel, 1997, p.22.For a detailed account of international production networks in Asia, please refer toBorrus et al. (2000).Flying geese hypothesis implies a more developed economy aiding and stimulatingeconomic growth in the less developed ones, which in turn aids and stimulates growth in theeven less developed economies, in the process making a functional chain of leader-followereconomies. Generally there will be one leader economy and several follower ones at variousstrata of economic development, providing an imagery of flying geese. Asian economicdevelopment, according to Akamatsu (1961) followed this paradigm, where the Japaneseeconomy was the lead economy, followed by the NIAEs as the second tier economies, andfurther down the line came the ASEAN-4 and China. The so-called flying geese paradigmremained an accepted paradigm of Asian growth for decades.Intra-regional production networks in East and Southeast Asia have been studied byHansen (2001); OECD (2002); Fukasaku and Kimura (2002) and Sakakibara andYamakawa (2003).China’s real GDP growth rate for 2003 was estimated at 9.5 percent (The Economist,2003b).The rapidly growing export value and volume in China is reflected in its fast expandingports. In addition to Shenzhen, the Chinese city of Shanghai, which in 2002 overtookKaohsiung as the world’s fourth-largest port (after Hong Kong SAR, Singapore and SouthKorea’s Pusan), saw traffic rise by almost 40 percent during 2002-03. Thanks to a surge inexports from southern China, throughput at Hong Kong SAR’s container terminals issoaring. Traffic at the Kwai Chung terminal, for instance, was up by 25 percent in the firsthalf of 2003 compared with the same period in 2002, according to the Port and MaritimeBoard of Hong Kong SAR (The Economist, 2003b).
Regionalism in Asia-Pacific24.25.26.
27.28.29.30.31.32.
33.34.35.36.37.38.39.40.41.
42.43.44.45.46.
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Refer to Das, 1996. Chapters 4 and 5 deal with this issue at great length and also providerelevant statistical data.The three of ‘Plus Three’ are China, Japan and South Korea.As noted in Chapter 1, note 11, the Agreement on a Treaty on the European Union with atimetable for Economic and Monetary Union was signed on 10 December 1991. TheMaastrich Treaty came into force on 1 November 1993, and with that the EEC becamethe EU.The expression ‘natural trading partner’ originated in Lipsey’s (1960) famous survey.This section has benefited from the Frankel and Wei (1997) survey.Non-tariff barriers include para-tariff measures, price control measures, financial measures,monopolistic measures, and technical measures.Results of these empirical studies are presented here in a cursory manner. Researchersdealing with this issue are advised to consult the detailed survey in Frankel and Wei (1997).It is acknowledged that this section draws heavily on it.For more details about the gravity model refer to Lee and Roland-Holst (1998).Other attempts were made to provide a theoretical foundation for the gravity model but theylacked a compelling economic justification. Anderson (1979) derived a reduced-formgravity equation from a general equilibrium model incorporating the properties ofexpenditure systems.LAIA stands for Latin American Integration Agreement. Its former name was LAFTA or theLatin American Free-Trade Area. This is a case of dual membership in that all the membersof the Andean Group and MERCOSUR are also the members of LAIA or LAFTA.It should be clarified that if the Australia–New Zealand Closer Economic Relations (ANZCER) is considered part of the Asian regional scenario, the CER is three years older thanOPTAD. The CER was agreed between the two economies in Oceania in 1965.The acronym SAARC stands for South Asian Association for Regional Co-operation.For an in-depth study of the characteristics and growth pattern of CER, readers are referredto BIE (1995).This agreement was signed in Manila, the Philippines, on 24 February 1977.This is according to the IMF definition of the emerging-market economies.The World Trade Organization, Trade Statistics, Table 19, July 2003.The World Trade Organization, Trade Statistics, Table 19, July 2003.It needs to be explained and clarified. The Eminent Persons Group report (APEC, 1994) hasthe following to say about open regionalism: ‘We recommend that APEC advocate themaximum extent of further unilateral liberalization by all member economies’.‘A number of economies in the Asia-Pacific region, especially those with relatively highlevels of protection, have unilaterally reduced their barriers to both trade and investment toa significant degree over the past decade. Indeed, such initiatives have been a major elementin expanding trade, investment and growth in the region – both for the economiesundertaking the liberalization and for their partners. We believe that unilateral liberalizationis not only virtuous per se but that it tends to feed on itself via positive demonstration effects.Individual economies are encouraged to liberalize when they see their trading partners doingso. They are in fact often impelled to do so, fearing that a more liberal neighbor may becomea more formidable competitor in trade terms and a more attractive site for foreigninvestment.’Plurilateral agreement implies an agreement between three or more members.Tariff binding is defined as commitment not to increase a rate of duty beyond any agreedlevel. Once a rate of duty is bound, it may not be raised without compensating the affectedtrading partners. Tariff binding is enshrined in Article II of GATT-1994.The 2000 Summit of APEC took place in Bandar Seri Begawan, Brunei Darussalam, 12–13November 2000.The CEP accord between New Zealand and Singapore was signed after 15 months ofnegotiations. It came in force on 1 January 2001.The term ‘new age’ was first used by the joint study group report, namely, Japan–SingaporeEconomic Agreement for a New Age Partnership. Tokyo and Singapore. Ministry of ForeignAffairs, Japan, and Ministry of Foreign Affairs, Singapore.
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It should, however, be pointed out that this was not the first ever bilateral RIA. In 1985, anFTA was signed between Israel and the US, which was the first bilateral FTA between anindustrial and emerging market economy. The agreement envisaged full reciprocal treatmentbetween the two partners, with some concessions to Israel. It was granted permission toimpose extra protection for its infant industries against imports from the US. The scope ofinfant industry protection was limited to those industries that were set up after the FTA wassigned. The period of infant industry protection was also limited to two years. This RTA hasbeen adjudged a successfully functioning arrangement between the two partners.48. Refer to Article 1.1, Paragraph 1, of the Articles of Agreement.49. The rest of the tariff lines are to be eliminated within eight years.50. Although the extent of tariff reduction may be modest in percentage terms, the amount oftariff saving in absolute level terms would be substantial given the high volume of trade(approximately $35 billion) between Singapore and the US.
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Regionalism in the WesternHemisphere
1. THE GLOBALISM AND REGIONALISM DICHOTOMYDuring the preceding quarter century, the dual forces of globalism andregionalism have been affecting the economies of Latin America. In a strikingcontrast to Asia, regional integration initiatives have long been part of thelandscape here. They flourished in the early post-war era, but then lostmomentum. In the mid-1980s, a new wave of regional integration began. Itcould be considered the resurgence of regionalism in Latin America, whichcoincided with the global phenomenon of ‘new regionalism’. The strong postwar preference of the United States for multilateralism, as opposed toregionalism, is well recorded. A tectonic shift in US strategy towards regionaltrading blocs took place in 1985, when President Ronald Reagan instructed theoffice of the United States Trade Representative, Department of Commerce, toexplore just how crucial regional and bilateral agreements were for globaltrade liberalization. This development had far-reaching repercussions.During this period, regional economies began reducing tariff barriersunilaterally. By the late 1990s, average tariff rates came down to 12 percent,from 40 percent in the mid-1980s. The regional economies were activeparticipants in the Uruguay Round and by the end of the 1990s all of them hadbecome members of the World Trade Organization (WTO). Along with theseglobal measures, 22 regional trade agreements were entered into force in LatinAmerica between 1990 and 2001, or old ones were renegotiated.1 Upgradingand revision of several past accords, which had lost momentum, was alsoundertaken during this period. Some of these agreements, like CARICOM(Caribbean Community and Common Market, see section 9.3), updated theirfounding treaty in order to establish the legal basis for moving towards a singlemarket in the short term.2The growth of globalism and regionalism in Latin America during thisperiod progressed pari passu with brisk growth in global trade until the Asiancrisis in mid-1997. Intra-regional trade also expanded from 13 percent of thetotal in 1990 to 20 percent in 2000. This was due to a decade-long trendaccording to which intra-regional trade grew at almost twice the rate ofexports to markets outside the region (IDB, 2002a). Annual average increase171
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in merchandise exports for the 1990s was 8.4 percent in terms of volume,which was only surpassed by China and a few other Asian economies. Theonward march of globalization made the policy mandarins in the regionreevaluate their development strategy. Their conscious objective was torealign it with the ongoing globalization, and be well integrated with theglobal economy. They were aware that globalization, managed well, hasenormous welfare implications (Das, 2003b). To meet this challenge, theystrongly supported a liberalized trade regime. Proactive endeavors were madeto strengthen economic ties with the North American economies and theEuropean Union. Liberalization of trade policy did improve trade performancein the region, as the trade statistics show. However, this dynamism on the tradefront was not reflected in real GDP growth rate in the region. In particular, thesmaller economies of the region continued to face the additional difficultiesbecause of their size including a lack of scale economies, higher unit costs ofproduction and unfavorable competitive position in most industries (ECLAC,2002).
2. THE GENESIS OF REGIONALISM IN LATIN AMERICARegional integration initiatives in the Southern Hemisphere date back to theindependence of the region. Thus, regionalism is Latin America has a muchlonger history than that in Asia and other parts of the globe. The originalobjective behind making regional or sub-regional trading blocs was political,but in the post-World War II era the principal motivating factors changed.Economic development became the prime objective driving the formation ofregional trading blocs. During the 1950s, before the Treaty of Rome wassigned (1957), there were frequent public debates on the need to createregional blocs like a Latin American Common Market. After a decade ofdeliberations and debates, followed by negotiations, the Latin American FreeTrade Area (LAFTA)3 was launched in 1960. Countries of the southern coneand Mexico were its constituent members. The five-member CentralAmerican Common Market (CACM)4 was also launched in 1960, followed bythe Andean Group (AG) in 1969.5 These three regional trading blocs, inparticular the CACM, enjoyed some measure of initial success. Of the three,CACM and AG were contiguous sub-regional country groupings. However,by the mid-1970s, they began experiencing serious difficulties and fell intocomplete disarray in the early 1980s.When these trading blocs were formed, developing economies, includingLatin American ones, were strongly under the influence of the old strategy of‘export pessimism’ propounded by Ragner Nurkse and Raul Prebisch. Thiswas the conventional wisdom of the mid-twentieth century and had wide
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acceptance in the developing world. The regional trading blocs of this periodwere formulated with the express purpose of underpinning the on-goingpublic-sector-led import-substituting industrialization endeavors in the LatinAmerican economies. Built into the export pessimism strategy was skepticismregarding the private sector as well as presence of foreign firms. It wasbelieved that foreign firms would create a dependence on them in thedeveloping Latin American economies, in turn undermining domesticeconomic development. It was firmly believed by the erstwhile policymakers that the road to industrialization goes through import-substitution.For this strategy to succeed, maintaining high or very high tariff levels wasa necessary condition. It was common to have effective protection rates of150 percent to 200 percent in the Latin American economies during thisperiod.The principal policy planks of the ISI strategy were economic and industrialplanning, creating large public sector enterprises and large-scale governmentintervention in the markets, so much so that the market forces were completelystifled. This was a dirigiste regime. Policy makers were of the opinion thatregional trading blocs fit well into the ISI regime because it would allowelimination of intra-regional trade barriers while maintaining a high level ofexternal protection. Therefore, it was expected that regional integrationagreements (RIAs) would enable the constituent members to plan for theentire regional or sub-regional markets, which would cover all the membereconomies. The hope was that this strategy would step up the pace of regionalindustrialization and lead to rapid real GDP growth.Intra-regional liberalization was