Hub and Spoke Theory:The Preference of East Asia Nations on Trade Agreements

Except for the case of unilateral liberalization, from an economic perspective, multilateral trade liberalization brings about the biggest improvement in allocative efficiency of resources, thus creating the greatest amount of welfare and total real GDP. This theory implies that multilateral trade negotiation should be supported by all nations. Yet, the rise of bilateral free trade agreements since the 1990s is somewhat contrary to this economic logic. With bilateral free trade agreements mushrooming around the world, the administrative and trade costs of enterprises and customs authorities are increasing to deal with various trade regulations. These costs reduce the benefits of liberalization, and lead to real GDP growth below the expected level. Therefore, some scholars predict that the current spaghetti bowl effect may induce all nations to advocate broader free trade areas. Yet, in spite of this prediction the growth trend of bilateral free trade deals remains unabated. Both of the two points mentioned above demonstrate that all nations should stand for the multilateral trade agreement or the broader free trade area. However none of them matches reality. In fact, nations of different roles could have different attitudes toward trade agreements or trade systems.

In the Wonnacott model nations are categorized according to a hub and spoke pattern in order to account for the preferences of these different roles on trade agreements. He finds that the spoke role nation prefers regional free trade to a hub-and-spoke pattern, but the preference of the hub role nation varies. In an attempt to extend the existing hub and spoke theory, this paper examines the hub and spoke roles of nations by introducing market scale as additional factor, and finds that small, middle, and large spoke nations prefer regional free trade agreements while the preference of small, middle, and large hub nations is uncertain, which is same as the results of Wonnacott’s study.

After analyzing the theoretical choice of hub or spoke on trade agreements, this paper tries to define hub positions from analyzing the complex FTA networks in the real world. From the perspective of the number of FTAs signed, it is impossible to define hub countries because a nation can play both hub and spoke roles simultaneously in the FTA networks. Hence, this paper adopts Baldwin’s market access perspective, and uses his hub-ness measure method to find the hub role nation in East Asia. The 2005 East Asia HM index suggests Japan as the main hub while the 2009 East Asia HM index indicates that China has already replaced Japan and has become the new hub country.

Finally, this paper examines whether the actual trade policies of East Asian nations match theoretical predictions of the hub and spoke theory for the cases of China, Thailand and Singapore. Our findings suggest that the hub and spoke element is not influential to the governmental decision-making process when a nation considers trade agreement options. This paper concludes that other factors explain the status quo of East Asia integration more adequately.