Dragon by the Tail, Dragon by the Head, Bilateralism and Globalism in East Asia

In this paper, we examine the bilateral implications of regional and global trade arrangements in the East Asian context. Using a dynamic global CGE model, we examine a variety of trade scenarios, in terms of bilateral relations between China and two of its most populace regional partners, Vietnam and Japan. Given the differences between the latter two economies, it might be reasonable to expect divergence in the bilateral outcomes. Our findings indicate that differences in initial conditions can indeed have a significant impact on bilateral adjustments, and that these can be adverse for some partners in the absence of policies that promote trade complementarity. By the latter we mean bilateral import and export patterns where the aggregate grows faster for each country than their total trade, but which help sustain bilateral balance of payments equilibrium.