The Yen Bloc

Despite Jacob Viner’s theory of economic integration and the distinction he made between trade creation and trade diversion, the advocates of economic co-operation have stressed the dynamic gains that could be achieved through greater mutual economic co-operation among countries of the same region. The potential members of a trading bloc or any other form of economic union apparently ignore the trade diversion losses and perceive welfare gains in pooled efforts. The other motivation for the formation of a bloc is perception of an external threat which, for the countries of the Asia-Pacific region, comes from the prospect of trade diversion from market unification of the European Community (EC) in 1992 as well as from the proposed trade linkages between the US and both Canada and Mexico. The threat of retaliatory action by the US under section 301 of the Omnibus Trade and Competitiveness Act of 1988 against the Asia-Pacific countries was also a serious one and created a nagging unease among the countries of the region.1 The possibilities of a dynamic co-operation — trade diversion notwithstanding — are greater for the economies that have followed market-based growth strategies and have dominant participation of the private sector. An adoption of outward-oriented industrialisation strategy in the framework of an open economy further enhances the feasibility of such a dynamic co-operation.