This study examines how strongly the Asia-Pacific region is interconnected through trade and investment, and analyzes the welfare implications of regional trade and investment liberalization in the APEC process. It is shown in this study that intra-regional trade and FDI in the APEC region actually work to strengthen interdependence among its member economies. In spite of unilateral as well as multilateral liberalization efforts of the APEC member economies, however, there still exist substantial barriers to trade and investment in the region. An empirical analysis of the welfare effects of regional trade liberalization implies that Singapore, Malaysia, Chile and Korea belong to the group that would benefit greatly from liberalization. However, the overall effects of regional trade liberalization are substantially affected by the relative size of scale effects. Meanwhile, it remains uncertain whether regional liberalization in the APEC would bring about convergence of income levels of member economies.

Contents

I. Introduction

II. Issues in Regional Trade and Investment Liberalization
1. Compatibility of Regionalism and Multilateralism
2. Political Economy of RTAs
3. Desirability of Open Regionalism

III. Patterns of Trade Flows in the APEC Region
1. Trade Flow Matrix
2. Specialization Structure
3. Export Similarities
4. Services Trade

IV. Trends and Patterns of FDI Activities in the APEC Region
1. Regional FDI Flows
2. FDI by the EU, Japan and the U.S.
3. FDI and Industrial Adjustment

V. Welfare Effects of Liberalization
1. Resource Allocation Effects
2. The Pro-competitive Effect and the Scale Effect
3. Intertemporal Substitution Effects on Savings and Investment
4. Total Effects of Liberalization
5. Implications for Income Convergence

VI. Barriers to Regional Trade and Investment Liberalization
1. Assessment of Barriers
2. Trade-Restrictiveness Indexes
3. Distortionary Effects of Investment Impediments

VII. Summary and Conclusion

References

APPENDIX

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