[NSP Report 46] Changes in the Global Trade Order After the Crisis

Professor, Graduate School of International Studies, Yonsei University. Professor Son Yeol holds a Ph.D. in Political Science from the University of Chicago and has served as a professor at Chung-Ang University, a visiting scholar at the University of Tokyo, and a visiting professor at Waseda University. His main research topics include Japanese politics and economy, international political economy, and East Asian regionalism. Recent publications include “Competing Visions of International Society in East Asia” (World Politics 2009), “The Politics of Soft Power: Japan’s Multiple Identities” (Journal of Japanese Studies 2009), “Japan Between Alliance and Community” (East Asia Institute Issue Briefing 2009), and “Japan's New Regionalism: China Shock, Universal Values and East Asian Community” (Asian Survey 2010, 50:3).

I. Introduction

Trade is a primary means of increasing national wealth. The East Asian countries that achieved high growth through a trade-oriented, outward-looking economic system are prime examples. Trade also serves as a tool of foreign policy. Because it brings benefits to trading partners, it imposes diseconomies on adversaries and positive externalities on allies (Gowa and Mansfield 1993). Thus, policies are used to check adversaries by controlling trade and to strengthen friendly relations with allies by expanding trade. On the other hand, an increase in a country's wealth through trade does not necessarily lead to an increase in its influence. This is because a country can be structurally subordinated by making it dependent on one's own imports for its growth path (export routes) (Hirschman 1945). Foreign policy objectives can also be achieved by strategically structuring trade patterns.

As trade is utilized as a means to pursue economic wealth and political power, states have sought to structure the international trade system to their advantage. The liberal trade order led by the United States after World War II was accepted as a kind of global public good, stemming from the perception that competitive protectionism among major powers during the interwar period had led to world wars. However, it also served the interests of the United States as the world's hegemonic power. Free trade confers relatively greater benefits upon the country with a comparative advantage (i.e., the hegemon) (Krasner 1985). The United States steadily pursued trade liberalization by leading a series of rounds within the framework of the General Agreement on Tariffs and Trade (GATT). At the same time, the U.S. pursued 'embedded liberalism' (Ruggie 1982), allowing Western Europe to maintain protectionist regulations to preserve domestic order and tolerating the mercantilist policies of Japan and South Korea for their economic growth. This was due to geopolitical considerations of the Cold War (Ikenberry 2004).

With the end of the Cold War, the United States put forth neoliberal values as the core of globalization. The so-called Washington Consensus was a language signifying the globalization of the American model of capitalism and a symbol of hegemony. To spread the capitalist standards of free markets, small government, and openness worldwide, the United States, on one hand, utilized the International Monetary Fund (IMF) and the World Bank, and on the other hand, pursued free trade policies. The argument was that 'free trade' is not only a means of increasing wealth but also a moral principle that promotes economic and institutional reform, eradicates corruption, and fosters habits of liberty, and therefore must be widely disseminated (White House 2002, 21-22). In other words, it went beyond simply dismantling trade barriers to demanding specific changes and convergence in domestic systems, thereby negating embedded liberalism. Furthermore, after the 1997 East Asian financial crisis, the excessive intervention by the IMF resulted in a decline in the organization's effectiveness, weakening its role as a proponent of the Washington Consensus. Consequently, free trade became the primary tool for the United States to pursue neoliberal globalization.

However, the effort to spread the U.S.-centric order through the Washington Consensus faced challenges even in the realm of trade. The 1999 World Trade Organization (WTO) Ministerial Conference in Seattle encountered strong opposition from anti-globalization activists, and the subsequent Doha Declaration in 2001 also stalled. Amidst this, the United States' competitor nations actively utilized Free Trade Agreements (FTAs) to build networks. European countries formed a single economic area through economic integration, and East Asian countries have also expanded and deepened their networks of bilateral FTAs (Dent 2007). In response, the United States shifted its strategy in 2002 from building order/regimes through international organizations to focusing on regional and bilateral FTAs. The goal was to realize the trade order desired by the United States through FTAs.

However, bilateral and plurilateral FTAs involve differing economic and strategic interests among partner countries, thus requiring network architecture and sophisticated implementation strategies to construct a coherent regime. This is because the economic space of the 21st century is a field of interdependence where actors are integrated into networks. Just as production networks and intra-industry and inter-industry trade within them intricately connect various economic actors, the characteristics of the power field also differ from traditional international politics. The essence of FTA competition will not be about one country forcing others to take sides and line up, but rather a network competition focused on how to connect with each other to realize one's own interests. Network competition here depends on the ability to define how members (nodes) connect within the network, i.e., the ability to design the network platform (architectural power); second, the ability to connect and mediate between different networks (positional power); third, the ability to disseminate the network (social power); and finally, the ability to mobilize domestic support for these external endeavors (Grewal 2008; Kim Sang-bae 2009; Kahler 2009).

This paper aims to analyze the dynamics of the construction and reconstruction of the U.S.-centric order and the challenges to it, primarily focusing on the East Asian region. First, it will describe the U.S. strategy for building a global trade regime through international organizations. Second, it will analyze the trends and nature of power shifts within the region. Third, it will analyze the new political-economic dynamics unfolding since the 2008 crisis. Finally, it will predict the future of regional trade regimes, centered around the United States and China. In the future, regional trade order will likely see intense network competition, with counter-networks led by the United States and Japan challenging the trade networks centered around China through deepening asymmetric interdependence. The competitiveness of the latter will depend on how effectively the network platform is designed to attract countries within the region.

II. The U.S. Hegemonic Order: The Rise and Fall of the Washington Consensus

The Washington Consensus is an ideological program that embodies the value of the free market globally. Initially, it referred to a minimum common denominator of economic reform programs for liberalization offered by Washington-based institutions (World Bank, IMF, U.S. Treasury) to Latin American countries (Williamson 1989). Subsequently, it has been equated with a broader economic ideology of neoliberalism or market fundamentalism, or even expanded to serve as a policy manifesto for economic development in developing countries. Trade is a key policy instrument in this context, based on the belief that free trade can reform domestic institutions and establish an economic system where market mechanisms operate. Free trade is seen as a means to increase wealth, and simultaneously as a policy tool to promote the rule of law, democratic governance, and the realization of a free life.

The Washington Consensus gained prominence in the 1990s, following the end of the Cold War. President George H.W. Bush described the global trade order as 'open borders, open trade, open minds,' and Bill Clinton championed a community of market democracies. This was a vision for a world sharing freedom—political democracy and economic market systems—as core values. While this was a U.S. global vision, it also extended to the East Asian region. U.S. policy during the Clinton administration sought to indiscriminately apply free trade policies, based on the premise that the free movement of goods, services, and capital benefits all parties. Japan, a long-standing ally, became a target for market opening, and South Korea was no exception. With the conclusion of the Uruguay Round, the U.S. actively utilized the Asia-Pacific Economic Cooperation (APEC) as an institutional mechanism to pursue market opening in the region. Through the Bogor Goals in 1993 and Early Voluntary Sectoral Liberalization (EVSL) in 1996, the U.S. drove trade liberalization in the Asia-Pacific region.

The peak of the Washington Consensus coincided with the 1997 East Asian financial crisis. South Korea and other East Asian countries had pursued financial liberalization in the early 1990s, not out of a need for more international capital, but due to international pressure—the propagation of the Washington Consensus. The East Asian economies were engulfed by the financial crisis as a result of internal maladjustment to openness, specifically inadequate management and supervisory systems, and asymmetric—uneven—liberalization. The IMF, which provided bailout funds to these countries, imposed stringent Washington Consensus implementation conditions in return. For instance, South Korea was required to implement comprehensive neoliberal reforms, including high interest rates, austerity measures, financial market restructuring, liberalization of capital transactions, corporate governance reform, labor market reform, and trade liberalization. In essence, the East Asian financial crisis was caused by the inadequate adoption of the Washington Consensus, and overcoming the crisis led to its even more thorough implementation.

Ironically, the harsh implementation conditions imposed by the IMF led countries to avoid seeking its assistance. This was to avoid the stringent conditions. East Asian countries adopted a strategy of accumulating foreign exchange reserves by increasing exports and reducing imports to avoid going to the IMF. Simultaneously, ideological opposition to the Washington Consensus programs pursued by the IMF and the World Bank emerged. Specifically, the logic of developing countries that neoliberal globalization primarily served the interests of a few developed countries, the criticism from Europe regarding the loss of social values due to market fundamentalism, and the critiques from non-governmental organizations (NGOs) in developed countries about the sacrifice of environmental and labor values converged, leading to the disruption of the 1999 Seattle WTO Ministerial Conference. This marked the first organized, large-scale resistance to the U.S.-centric order.

Subsequently, the 2001 Doha Round was also marked by resistance to free trade. Although efforts were made to link development issues to trade and to comprehensively address various issues such as agriculture, services, environment, and intellectual property rights, progress was hindered by conflicting interests between developed and developing countries. The 2003 Cancun Ministerial Meeting also ended in disarray without significant outcomes.

Recognizing that the promotion of the Washington Consensus could not be achieved through global multilateral organizations, the United States shifted its policy to pursue it through regional multilateral and bilateral FTAs. The key figure in this shift was Robert Zoellick. As the U.S. Trade Representative (USTR) at the time, he articulated the new trade policy with the concept of 'competitive liberalization.' The plan was to achieve worldwide trade liberalization by pursuing global multilateral agreements, regional, and bilateral FTAs in a complementary and mutually reinforcing manner (Zoellick 2002). This was underpinned by the perception that free trade is not merely a means to achieve economic prosperity but also a tool to promote democracy. As President Bush's message stated, 'Open trade strengthens the habits of liberty that sustain democracy in the long run,' trade was considered an important means to pursue America's goals of spreading freedom and democracy, especially after the tragic terrorist attacks of September 11th (White House 2002).

Specifically, Zoellick sought to pursue four categories of U.S. national interests through trade: First, 'asymmetric reciprocity,' where the asymmetry of market power is leveraged to secure negotiating advantages and open partner country markets to U.S. companies. Second, to establish precedents or models that serve as catalysts or benchmarks for comprehensive trade agreements. Third, to support domestic market-oriented reforms and democratic institutions in partner countries. Fourth, to strengthen strategic partnerships with leading countries in the region.

According to Higgott (2004), the Bush administration's unilateralism was based on a peculiar ideological combination of liberal-idealist fundamentalism, leading to the 'securitization of globalization' in economic policy. That is, neoliberal or Washington Consensus policies were pursued under strategic objectives, and the institutional mechanism supporting this was the 'Bipartisan Trade Promotion Authority of 2002.' This granted Congress fast-track authority to the executive branch for trade negotiations, enabling the securing of 'more open, equitable, and reciprocal access,' which was possible in the context of the war on terror at the time.

The countries with which the United States signed FTAs include Jordan, Chile, Singapore, Australia, Morocco, Oman, Bahrain, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Panama, Colombia, and South Korea. Thailand and Malaysia are countries with whom negotiations were suspended. With the exception of South Korea and Australia, these are countries that are not economically large, and were thus selected based on strategic value rather than economic value. The countries in the Americas were chosen with the strategic consideration of firmly securing the region for the United States, while Islamic countries were selected in the context of the war on terror (Sohn and Koo 2010). For example, when the U.S. initiated FTA negotiations with Malaysia, it stated, 'Malaysia is a moderate Muslim country and an important partner in the war on terror; therefore, an FTA with Malaysia will advance important policy objectives from a security perspective.'... (continued)'