Third World Quarterly, Vol 24, No 2, pp 339–355, 2003 Embedded mercantilism and open regionalism: the crisis of a regional political project KANISHKA JAYASURIYA ABSTRACT This paper advances the argument that moves towards regional integration need to be understood as ‘regional governance projects’ undertaken by domestic actors and coalitions. Regional political projects—such as open regionalism—have roots in domestic structures, and it is this which defines the broad configuration of the regional political economy. On the basis of this frame- work the paper suggests, first, that the strategy of open regionalism was con- tingent on a particular configuration of power and interests in the domestic and external economy (embedded mercantilism). Second, this system of embedded mercantilism depended on a set of domestic coalitions between tradeable and non-tradeable sectors of the economy. The non-tradeable sector in Southeast Asia was entrenched within a particular system of political patronage. Third, the Asian crisis and other structural changes in the international economy have made these domestic coalitions less sustainable, thereby creating opportunities for new forms of regional governance projects. Strategies of regional integration as political projects Open regionalism, in terms of the conceptual framework advanced in this paper, is not so much a strategy of economic liberalisation as a regional regime of political economy that encompasses a set of institutions, domestic coalitional structures and international strategies. The nature of regional integration in East Asia, it will be argued, needs to be understood in the context of the manner in which domestic structures have underpinned a particular project of regional integration that goes under the rubric of open regionalism. The coherent moves towards regional integration need to be seen as ‘political projects’ undertaken by domestic actors and coalitions. In other words, regional political projects have roots in domestic structures, and these domestic structures in turn have come under increasing pressure in an era of globalisation. The neglect of the domestic foundations of foreign economic and security policies warrants critical analysis, as there is an important lacuna in the literature on multilateralism in East Asian policies. Much of the literature—whether realist, liberal or constructivist—use an ‘outside in’ methodology to understand foreign Kanishka Jayasuriya is Associate Professor in the Department of Politics and Social Administration at the City University of Hong Kong. E-mail: [email protected]. ISSN 0143-6597 print/ISSN 1360-2241 online/03/020339-17 ᭧ 2003 Third World Quarterly DOI: 10.1080/0143659032000074628 339 KANISHKA JAYASURIYA economic and security policies.1 In contrast, this paper seeks to develop an ‘inside out’ framework to understand the dynamics of regional economic order (see my introduction to this special issue). More specifically, it attempts to explore the role of domestic coalitions in underpinning a range of outward- orientated policies. It is argued that a particular set of arrangements between the tradeable and non tradeable sectors—which, borrowing from Pempel (1998), we term ‘embedded mercantilism’—drove the domestic engine of regionalism.2 Adopting this different perspective, regional strategies such as ‘open regional- ism’ need to be analysed and understood within the broader framework of what may be termed ‘regional governance projects’. Such ‘governance projects should be seen as being composed of four central elements: 1. a stable set of international economic strategies; 2. a distinctive set of governance structures which enables regional economic governance; 3. a set of normative or ideational constructs that not only makes possible a given set of regional governance structures, but also makes possible the very definition of the region; 4. a convergence of domestic coalitions and political-economy structures across the region, which facilitates the coherent construction of regional political projects. On the basis of the above framework, this paper will endeavour to show that the governance project that characterised the East Asian region before the crisis was underpinned by the following features: ● the dominance of open regionalism as a strategy of international liberalisation; ● the presence of a set of informal rather than rules-based governance structures; ● an ideational framework that places emphasis on a cultural definition of the region, which depends on what Beeson and Jayasuriya (1998) term a ‘cameralist political rationality’; ● the emergence of a form of embedded mercantilism and domestic political economy divided between the tradeable and the non tradeable sector. Applying this regional governance framework to strategies of regional integra- tion in East Asia, the nub of the argument advanced here is that the domestic configuration—identified as ‘embedded mercantilism’—has created the dis- tinctive forms of multilateralism exemplified by the APEC in the Asia Pacific. This embedded mercantilism rested on a specific set of trade-offs between the tradeable and the non-tradeable sectors. But, in the wake of the Asian crisis, these domestic foundations appear to be more brittle and more diverse. As a consequence, there are important fissures between those states dominated by reform-orientated coalitions and others where nationalist coalitions still remain deeply entrenched. Open regionalism: economic technique or political project? Open regionalism is basically a strategy of unilateral trade liberalisation with the 340 EMBEDDED MERCANTILISM AND OPEN REGIONALISM extension of its benefits to non-APEC member countries on the basis of the General Agreement on Tariffs and Trade (GATT) principle of Most Favoured Nation (MFN) status (viz that concessions offered by one country to any other GATT member should be offered to all). The rationale behind ‘open regionalism’ is that a greater access to free trade within a designated area will increasingly produce positive trade liberalising effects on other trade blocs and countries through the GATT’s MFN principle. It is argued that this has the virtual effect of avoiding trade diversion—a standard effect of a customs union (a trade area with common external restrictions). Open regionalism, therefore, extends the benefits of free trade to a greater proportion of the international economic system than just the member countries of APEC. In short, it is a trade liberalising strategy, the aim of which is to create lower trade barriers across the international economic system. The competing notion of ‘bloc regionalism’ is based on the assumption that unilateral trade liberalisation is not likely to be effective. Non-APEC members, it is suggested, are able to gain a free ride on trade liberalisation while holding back on their own domestic trade liberalisation agendas. From this perspective, for APEC to be an organisation of effective economic co-operation it is necessary that there should be reciprocal trade concessions from non-APEC members. APEC’s huge and rapidly developing market would provide a further carrot for non- members. This vision for APEC is premised on the more political APEC principle of reciprocity. An even stronger version of bloc regionalism would suggest that APEC develop a well regulated customs union along the lines of the European Community. However, this strong form of block regionalism is economically and politically untenable: economically, because of the vast differences in levels of economic development and the fact that most East Asian trade (if the USA is excluded) is more inter-regional than intra-regional; politically, because in the light of the problems faced by the North American Free Trade Agreement (NAFTA), it would be well nigh impossible to gain political acceptance for such a position in the USA, and more importantly, it would require a successful resolution of US–Japanese trade issues. But, politically, the critical issue relating to open regionalism is not just its technical rationale as a set of economic strategies, but rather that this rationale reflects an underlying set of politically constituted set of relationships between market sectors. Open regionalism is not about regional market making but about maintaining export markets; and also about helping to cement the dominant coalition between domestic cartels in the non-tradeable sector and the tradeable sector. For these reasons, open regionalism may be seen as denoting a particular political project of regional integration undertaken by powerful domestic actors. One of the attractions of open regionalism for powerful domestic coalitions lies in its informal and flexible nature of regional economic governance, which eschews formal rules-based regional integration. In East Asia, where the position of ruling elites is closely bound up with the existing economic structure, the possible formation of markets beyond the state’s influence as a self-regulating and autonomous sphere strikes at the heart of the kinds of segmented political economies, characteristic of East Asia. Indeed, such a transformation represents a direct threat to dominant patterns of political and economic power. 341 KANISHKA JAYASURIYA More generally, these points underscore the fact that multilateral strategies are deeply intertwined with domestic economic and political projects. During the boom years, the APEC strategy of trade liberalisation within the ambit of open regionalism fitted well with the political projects