Regional Integration and Economic Growth in the Long Run: A Comparative Case Study of Vietnam and Mexico in the Asia-Pacific Region

INTRODUCTION The decade of 1990s marked an expansion of regional trade agreements in various parts of the world that was called the "second wave of regionalism" or "new regionalism." The enlargement of the EU to countries from Central and Eastern Europe, the creation of NAFTA and MERCOSUR, and the regrouping of all countries in South-East Asia along with the AFTA project illustrate this phenomenon. APEC appears, among other regional agreements, an interesting case since it is not a formal trade agreement but a "community" formed by a diverse group of developing and advanced economy members with the common interest of promoting trade and investment. Many countries that integrated in APEC are members of other sub-regional blocs like ASEAN and NAFTA. Therefore, APEC provides a useful alternative to the EU as a new way to pursue regional economic integration called "open regionalism." One of specific characteristics of new regionalism scheme is economic integration between developed partners or blocs and developing countries (called North-South integration) that have recently made, or are making, significant unilateral reforms. Many developing and transition economies have been involved in the process of reforming their economic policies and their governance system. This differs radically from the first wave of regionalism or "old regionalism," which involved countries with similar level of development called North-North or South-South integration during the 1960s and 1970s. In this changing context, a great number of developing countries have had a strong interest to link to developed countries in the same region in order to seek an institutional shelter that had been already well-established and achieved credibility in the eyes of foreign investors in the race to attract foreign direct investment, a key variable contributing to long-run economic growth. Despite the broader gap of economic development between Mexico and NAFTA compared with that of Vietnam and more advanced ASEAN partners, experiences of both illustrate such a new regionalism theory considering economic integration as an endogenous factor. Despite the hypothesis of growth and trade creation in well-known regional blocs like EU, NAFTA, or ASEAN has been tested by many authors, the impact of free trade agreements on developing countries are examined less, especially in an international comparison. This paper examines the possible linkage between trade liberalisation and economic growth of Vietnam and Mexico during the last decade by adopting a comparative study of their trade and FDI patterns in the long run by testing their natural trade structure with the gravity model. Furthermore, it suggests lessons learned from the experience of new regionalism initiated by Ethier (1998) focussing on the asymmetric relationship between developed and developing partners participating in a regional trading bloc and suggests how regional cooperation helps these developing members face the challenge of globalisation. This paper is structured as follows. Part I presents a brief concept of new regionalism initiate by Ethier (1998). Part II focuses on trade and FDI patterns of Mexico and Vietnam in the long run. It analyzes the evolution of trade relations of Mexico and Vietnam in the regional environment during the last decades. Part III estimates the natural structure of trade of Mexico and Vietnam in the context of the Asia-Pacific region. Part IV discusses issues that Mexico and Vietnam have faced while involved in an asymmetric trade agreement. THE CONCEPT OF NEW REGIONALISM The traditional theory of economic integration started with the paradigm of Viner (1950), accounting the net effect of trade creation and trade diversion in a world composed of a protectionist bloc and the rest of the world. Later on, this conceptualization evolved to a world composed of several "natural" blocs with the acknowledgement of transport costs. …