ASEAN - A REGIONAL TRADE PACT MODEL FOR STATES IN THE GLOBAL SOUTH.

• Author: Gipson, Jr., Ronnie R.

I. INTRODUCTION 393 II 394 A. Understanding Free Trade 394 1. Mercantilism 394 2. Free Trade & Comparative Advantage 396 3. Regional Trade Pacts 397 B. The Rise of Nationalism Threatens Free Trade 399 C. The European Union 400 III 402 A. ASEAN 402 1. Composition & Structure 402 2. Dispute Settlement 404 3. Historical Development 405 4. ASEAN is a Highly Effective Regional Trade Pact 408 a) Singapore 409 b) Thailand 411 c) Malaysia 414 d) Indonesia 416 e) The Philippines 419 5. The ASEAN Playbook as a Model for Success 422 6. States Categorized as the Global South are Well Positioned to Capitalize on the ASEAN Model 425 IV. CONCLUSION 428 I. INTRODUCTION

This article posits that the states in the Global South would benefit from the formation and implementation of the regional trade pact model by replicating the approach of the Association of Southeast Asian Nations ("ASEAN"). ASEAN utilizes the regional trade pact model to achieve an optimal balance between the pursuit of free trade principles in international trade policy juxtaposed against the perceived erosion of state sovereignty. As a result, free trade is sustainable as an anchor component of trade policy in the future, just in a modified form. An underlying premise that must be advanced to understand how free trade can thrive in today's complicated global trading arena is that the benefits of free trade are best realized through the use of a Regional Trade Pact. (1)

Part I of this article sets the stage for the substantive discussion by expounding on the concept of free trade; a brief look at how nationalism threatens this economic principle; and the functioning of regional trade pacts. Part II of this article demonstrates how, in the short span of four decades, ASEAN has successfully implemented an overhaul of the member states' domestic economies to include free trade principles. The end result of the long-term overhaul process is a stronger corps of states that enjoy economic success in the global trading arena because of (i) the maximization of domestic comparative advantage; and (ii) by leveraging bargaining power of the collective regional trade pact against states with significantly more trading muscle and resources.

This article then connects the different themes to demonstrate that free trade in the international arena is sustainable and that it thrives when the optimal balance between promotion of trade and interference with domestic decision making is achieved. Finally, the article advances the notion that states within the Global South, that are regionally connected, would be well served by adopting the ASEAN model of a regional trade pact in order to improve their economies and trading positions within the global trading arena.

II.

A. Understanding Free Trade

Free trade is one form of several economic theories that can guide a state's trade policy. Trade policy refers to a state's regulations and agreements that control imports and exports to foreign countries. (2) Broadly, there are two basic approaches that trade policy can follow--mercantilism or free trade. Mercantilism operates under the presumption and the belief that certain domestic industries, specifically labor and national culture, will be harmed by foreign competition. (3) Free trade, by contrast suggests that the international exchange of goods and services benefits all states that participate in the trade of goods and services through realized efficiencies in the instrumentalities of production. (4)

1. Mercantilism

   Mercantilism represents the first systematic approach towards the development of a trade policy gaining widespread acceptance in the seventeenth and eighteenth centuries. (5) A key objective of mercantilism is to emphasize a "favorable balance of trade" among states who trade with each other. (6) A favorable trade balance is achieved when the value of domestic goods exported exceeds the value of foreign goods that are imported. (7) Mercantilists view exports favorably and imports unfavorably. (8) The net result for the trade conducted is a trade surplus for one country and a trade deficit for the other country.

   For instance, under the mercantilists' view, exports of raw materials for use by foreign manufacturers are harmful because they deprive domestic manufacturers of raw materials thus diminishing domestic production and exports. (9) On the other hand, mercantilists view the import of raw materials for use by domestic manufacturers as beneficial to the domestic economy because the import of those raw materials enables domestic manufacturers to produce quality, cost-efficient goods. (10) Therefore, mercantilists argue that government policy should support these beliefs. As a result, governments influenced by mercantilists institute taxes, or tariffs, on trade to manipulate the relationship between exporting and importing countries in an effort to achieve a favorable trade balance."

   However, in the greater context that considers all the global players involved in trade, a favorable trade balance turns out to be an illusory and unreachable goal. The flaw with pursuing a mercantilist approach to trade is that not every country can have a trade surplus, even though each country participates in trade with the goal of achieving a trade surplus. (12) It is impossible for every country to achieve a trade surplus when trading with other nations because of the disparity in economic resources inherent in each country. (13)

   Noted economist Adam Smith was an ardent opponent of mercantilism. Smith argued that countries should extract the most productivity from the resources on hand in order for society to achieve a higher standard of living. (14) Smith was especially critical of trade policy tools such as export subsidies and import restrictions (tariffs). (15) Smith espoused the idea that trade restrictions in any form were not presented for the good of the country or in support of nationalistic ideals, but instead were implemented for the protection of special interest groups. (16)

2. Free Trade & Comparative Advantage

   Free trade is an economic doctrine that sits juxtaposed against mercantilism. Free trade and mercantilism sit at opposite ends of the trade theory spectrum operating with the following truisms. First, no nation-state has the natural resources to be self-sufficient. (17) Therefore, a state that implements a trade policy that excises this truism from its policy proclamations is destined to encounter long-term trade challenges. Free trade calls for the removal of government restrictions to trade commonly referred to as the process of "trade liberalization." (18) Increased trade leads to increased competition that results in a better quality of goods; therefore, the consumer benefits. (19) Moreover, with increased trade, consumers have a greater variety of goods to select from because they gain access to products from different countries, which also leads to lower prices. When faced with higher quality and lower cost goods, efficiency of production by domestic manufacturers increases because market forces dictate the speedy removal of manufacturing inefficiencies. Otherwise, domestic manufacturers would not be able to compete over the long term in the marketplace. (20) Next, free trade leads to specialization where certain domestic manufacturing processes retreat in importance due to the introduction of more efficient foreign competitors into the domestic marketplace. (21) Specialization hinges on recognition and utilization of a state's comparative advantage.

   In the first quarter of the nineteenth century, the theory of comparative advantage emerged. (22) Comparative advantage as a doctrine provides that a country should only produce goods where plentiful resources and technological knowhow combine to make the production process efficient. (23) The production process maximizes the use of plentiful resources and manpower knowledge.

   Consider, the following example with two fictitious states, Ibo and Lilk.

   Both states produce two products: running shorts and cell phones. Ibo has the natural resources and manpower to efficiently produce running shorts. Meanwhile, to produce cell phones, Ibo must import a lot of raw components and foreign technical knowledge. Ibo has a lower opportunity cost in the production of running shorts (natural resources are abundant within its territory) and specialization (the state's labor force is technically skilled at producing this good). Ibo's focus on producing running shorts utilizes beneficial resources and talents supplied domestically which in kind leads to higher output levels. Applying free trade principles, Ibo has a comparative advantage in the production of running shorts. Therefore, Ibo should adjust its trade policy to support the efficient production of running shorts and possibly trade this item for cell phones.

   In contrast to Ibo, the nation-state of Lilk is resource-rich in aluminum, a key component necessary for cell phone manufacturing. Based on territorial size, education of the population, and abundant natural resources, Lilk is better positioned to efficiently produce cell phones rather than running shorts. Consequently, Lilk has a comparative advantage in the production of cell phones. The hypothetical situation presented shows that it is costly and inefficient for both Lilk and Ibo to dedicate their finite trade resources to the production of running shorts and cellphones respectively. Instead, each state should take advantage of their comparative advantage in domestically produced products that can be efficiently made with domestic resources. The net effect is a stronger economy for both states that is more cost-effective and prosperous over the long term.

3. Regional Trade Pacts

   How can a regional trade pact strengthen or perpetuate free trade? The regional trade pact formation agreement, as a goal, seeks to establish common rules of governance on trade for a geographically centered group of states...