Varieties of regional integration, international trade networks and risk

• Published date: 01 September 2019
• Date: 01 September 2019
• DOI: http://doi.org/10.1111/twec.12831

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wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2790–2815.

© 2019 John Wiley & Sons Ltd

Received: 25 September 2018

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Revised: 14 May 2019

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Accepted: 4 June 2019

DOI: 10.1111/twec.12831

ORIGINAL ARTICLE

Varieties of regional integration, international trade

networks and risk

SandraSeno‐Alday

The University of Sydney Business School, Sydney, NSW, Australia

Funding information

Sydney Southeast Asia Centre (SSEAC) Business Grant, Grant/Award Number: 2013-2014

KEYWORDS

international trade, networks, regional integration, risk

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INTRODUCTION

Do our relationships make us strong? The predominant assumption is that close relationships among

countries make the global landscape sturdy, stable and resilient (Sapir, 2011; Whalley, 1998). This

prevailing thinking is evidenced in the number of multilateral regional trade agreements (RTAs) en-

forced since 1958 (World Trade Organization, 2015). While there has been a sharp growth in RTAs

in recent decades, these agreements have in fact been the primary mechanism for achieving interna-

tional cooperation for more than 140years (Estevadeordal & Suominen, 2008). This offers further

evidence of the long‐standing view that close, cooperative relationships among countries make indi-

vidual countries stronger and the world economy less risky.

Few studies, however, have challenged the assumption that close economic and political relation-

ships reduce risk and vulnerability. Several studies have certainly found evidence that RTA member

states are less likely to engage in disputes and conflict with each other (Chacha & Stojek, 2019; Glick

& Taylor, 2010; Mansfield & Pevehouse, 2000; Schultz, 2015). But some scholars have underscored

that in some cases, regionalism increases trade friction and heightens the possibility of conflict and

hostility (Davis, Fuchs, & Johnson, 2019; Fisman, Hamao, & Wang, 2014; Perroni & Whalley, 1996).

These opposing findings point to a significant opportunity to revisit the nature of relationships that

emerge within the context of RTAs and explore their implications on risk: do countries stand stron-

ger united, or do close interconnections create a Petri dish of perfect conditions for contempt and

contagion?

Guided by the conceptual framework in Figure 1, this paper explores the relationship between va-

rieties of regional integration (Balassa, 1961) and the characteristics of commodity trade relationship

networks that emerge within these differently integrated regions. It is argued that different integration

frameworks create unique conditions that encourage countries to engage in very specific kinds of

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cooperative activities. This fosters trade relationship network structures that are unique to the regions

governed by those agreements. The paper then explores the implications of these emergent intra‐re-

gional trade network structures on the characteristics of intra‐regional risk. It is argued that because

the emergent networks of trade relationships in differently integrated regions are distinctive, then the

risk characteristics across these regions are likewise unique. The resulting impact on regional risk and

economic performance acts as a feedback mechanism that motivates countries to retain, deepen or

decrease the extent of their integration, and provides inputs to national and regional risk management

strategies.

The paper begins with an overview of Balassa’s regional integration typology (1961), followed

by a brief introduction to graph theory (i.e. the area of mathematics that underlies network analysis).

The paper then contrasts the integration frameworks of the Association of Southeast Asian Nations

(ASEAN) and the European Union (EU) and locates them on the spectrum of the Balassa typology.

ASEAN is classified as a free trade area (FTA), while the EU is classified as a fully integrated region;

therefore, the locations of these two types of agreements on extreme ends of the Balassa spectrum

offer a good opportunity for comparison. The evolution of the intra‐regional trade networks of both

regions from 1990 to 2014 is compared, and differences in the networks' structural and risk charac-

teristics are explored. The data show that the more loosely connected ASEAN trade network is vul-

nerable to the failure of a few highly connected countries (concentrated vulnerability), while the more

deeply, widely and densely connected EU trade network is vulnerable to the failure of any one of its

countries (random vulnerability). The paper concludes with a discussion of the implications on risk

management and recommendations for further study.

FIGURE 1 Regional integration, intra‐regional networks and risk

Type of regional

integration

Intra-regional trade

networks

Intra-regional risk

feedback loop:

integration and

risk management strategies

TABLE 1 Number of regional trade agreements (RTAs) by date of entry into force

Years

Number of RTAs

entered into force

1950–59 1

1960–69 2

1970–79 11

1980–89 8

1990–99 59

2000–09 127

2010–14 60

Note: Data obtained from the World Trade Organization (2015).