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Purpose – This chapter suggests that the value of the extension to free trade areas (FTAs) of the Kemp–Wan (KW) theorem on necessarily welfare-improving customs unions is undermined by its very rationale – the greater popularity of FTAs over customs unions for ‘political’ reasons.

Methodology/approach – We discuss some intuition supported by partial equilibrium diagrammatic analysis and then present simulations of a global CGE model.

Findings – We argue that this sort of FTA will likely be unattractive to potential member countries. We then observe that the external tariffs here and in KW will be identical for many goods but illustrate, in a partial equilibrium setting, a context in which there might be some difference between them. Nevertheless, our analysis suggests that there are reasons to expect some harmonisation of tariffs between member countries in this sort of FTA.

Originality/value – We are the first to question the practical value of the extension of KW to FTAs. We also provide one of the few computable general equilibrium analyses of KW customs unions.

The leaders of the Association of the Southeast Asian Nations (ASEAN) announced to negotiate a Regional Comprehensive Economic Partnership (RECP) in November 2012, which is comprised of 10 ASEAN Member States (Thailand, Indonesia, Philippines, Malaysia, Singapore, Brunei, Vietnam, Cambodia, Laos, and Myanmar) and its six FTA partner countries (China, Japan, South Korea, Australia, New Zealand, and India). Embedded in the ASEAN Charter and implemented in all existing ASEAN + 1 FTAs, the ASEAN Centrality has been a corner stone principle in ASEAN-centric economic initiatives. Emerging discord in the region, complicated security climate and the rise of China, among others, have put the ASEAN Centrality under challenge. The development of the RCEP provides a timely case to assess ASEAN’s leadership role in creating the world’s most populous Free Trade Area. The RCEP may enhance ASEAN’s central role, but ASEAN needs to address challenges facing the regional integration now and beyond 2015. On the country/economy level, the chapter reviews some ASEAN Member States and their FTA Partners how they practice their ASEAN policy and seek leadership role in ASEAN. The three major players in ASEAN-Indonesia, Thailand, and Malaysia have reiterated the importance of the ASEAN Centrality in their foreign policy in the past, but debates emerge whether, such as in Indonesia, ASEAN Centrality best suits the national interests. The chapter also explores how the major powers, including China and the United States, respond to and collaborate with the group of smaller developing country players.

We have used the Michigan computable general equilibrium (CGE) model of World Production and Trade to calculate the aggregate welfare and sectoral employment effects of the menu of U.S.–Japan trade policies. The menu of policies encompasses the various preferential U.S. and Japan bilateral and regional free trade agreements (FTAs) negotiated and in process, unilateral removal of existing trade barriers by the two countries, and global (multilateral) free trade. The U.S. preferential agreements include the FTAs approved by the U.S. Congress with Chile and Singapore in 2003, those signed with Central America, Australia, and Morocco and awaiting Congressional approval in 2004, and prospective FTAs with the Southern African Customs Union (SACU), Thailand, and the Free Trade Area of the Americas (FTAA). The Japanese preferential agreements include the bilateral FTA with Singapore signed in 2002 and prospective FTAs with Chile, Indonesia, Korea, Malaysia, Mexico, Philippines, and Thailand. The welfare impacts of the FTAs on the United States and Japan are shown to be rather small in absolute and relative terms. The sectoral employment effects are also generally small in the United States and Japan, but vary across the individual sectors depending on the patterns of the bilateral liberalization. The welfare effects on the FTA partner countries are mostly positive though generally small, but there are some indications of potentially disruptive employment shifts in some partner countries. There are indications of trade diversion and detrimental welfare effects on nonmember countries for some of the FTAs analyzed. Data limitations precluded analysis of the welfare effects of the different FTA rules of origin and other discriminatory arrangements.

In comparison with the welfare gains from the U.S. and Japan bilateral FTAs, the gains from both unilateral trade liberalization by the United States, Japan, and the FTA partners and global (multilateral) free trade are shown to be rather substantial and more uniformly positive for all countries in the global trading system. The U.S. and Japan FTAs are based on “hub” and “spoke” arrangements. We show that the spokes emanate out in different and often overlapping directions, suggesting that the complex of bilateral FTAs may create distortions of the global trading system.

China, Japan, and South Korea have been discussing and investigating, through communiqués and their governmental research institutes, the feasibility of a free trade agreement (FTA) among them. Separately, Japan and Korea have announced that they will finalize an FTA by the end of 2005. A China and Korea FTA may follow. For all three countries, and for Korea particularly, a tripartite FTA, termed here FEAFTA (Far Eastern Asia Free Trade Agreement), will be the best arrangement to truly reduce trade barriers in all sectors including agricultural industry. Statistical analysis shows that trade and gross domestic product (GDP) (particularly for Korea) will increase substantially. The trade talk background, trade negotiations, trade issues, and the impacts of such an FEAFTA are discussed.

Regional trading arrangements are proliferating at a rapid pace in the Asia-Pacific region, although the architecture that will eventually emerge remains uncertain. In this chapter we explore the economic implications for both China and its trading partners of the current crop of preferential arrangements and potential future developments in the Asia-Pacific region, using computable general equilibrium simulations. By doing so the chapter aims to identify factors that are likely to weigh heavily in the economic interests of the different participants in some of the alternative ways in which the trade architecture of the region might develop, and the extent of convergence or divergence in these interests.

Purpose – The chapter examines whether the well-known Kemp–Wan proposition about customs unions is valid for free trade associations (FTAs).

Methodology/approach – The chapter employs the assumption of perfect competition but with considerable generality.

Findings – It is shown that the Kemp–Wan proposition is valid for any form of FTA. It is also shown that sense can be made of the common conjecture that a customs union is more beneficial to the world economy than a comparable but distinct FTA.

Originality/value – The findings are of significance in view of the recent tendency of governments to prefer FTAs to customs unions.

Purpose – A free trade agreement (FTA) or a preferential trade agreement (PTA) is almost always negotiated without concessions to the non-member countries. This chapter studies the welfare effects of such an FTA or PTA on the non-member countries.

Methodology/approach – This chapter employs the revealed preference approach (e.g., Ohyama, 1972; Kemp and Wan, 1976; Deardorff, 1980).

Findings – Under such conditions that the initial levels of the tariffs are small, or that the effects on production efficiency dominate the effects on tariff revenue, or that the tax-subsidy scheme proposed by Bhagwati, Ramaswami, and Srinivasan is employed in all the countries, the formation of a PTA without any tariff concessions to the outside countries will harm the welfare of the outside countries.

Practical implications – In order to make a PTA beneficial not only for member countries but for the rest of the world, member countries need to grant some tariff concessions to the imports from the non-member countries.

This chapter applies the new heterogeneous firm CGE model of Caliendo and Parro (2009) to determine what the Ricardian gains are from changing partners for members of a trade bloc. We focus on the MERCOSUR case, using a model with 48 sectors and 5 countries. Motivated by recent policy discussions, we quantify Uruguay's trade and welfare effects from signing a Free Trade Agreement with the United States and leaving MERCOSUR. We find positive welfare effects for Uruguay from bilaterally reducing tariffs with the United States. Most of the gains come from having access to lower-cost intermediate inputs for production. We then consider the policy experiment of bilaterally eliminating tariffs between all members of MERCOSUR and the United States. We find that Uruguay has the largest gains, while Argentina and Brazil do not benefit much. This chapter also illustrates how new models are a promising tool for the analysis of trade.

Allied forces commanded by the American five star General Dwight D. Eisenhower won the War in Europe on May 8, 1945, and Western Europe was liberated. Immediately thereafter, in 1947, President Truman signed the Marshall Plan to make funds available for the economic reconstruction of war-ravaged Europe. To the applause of thousands of Europeans, President Kennedy stood at the high podium facing the Berlin Wall and proclaimed, “I am a Berliner.” President Reagan called for the end of the Cold War and the Berlin Wall came down in 1989. During the conflicts in Southeastern Europe in the 1990s, President Clinton led the war under North Atlantic Treat Organization (NATO) command, with full support of European allies, and stopped the massacre of innocent peoples in the region. Since WWII, the core of America's European policy has been one of participation and cooperation.