A Trade Game

Over the last two decades (1990-2010), the trade/GDP ratio is 131 per cent (in 2010) for the region as a whole (Petri, Plummer, and Zhai 2012). ASEAN markets are especially important for Laos and Viet Nam. However, Laos appears to be a ‘free rider’ in ASEAN and Viet Nam is a loser, although the latter is a potential player for agricultural productions.^[1] As trade is an important driver of economic growth, ten members of ASEAN agreed to implement the AEC by the end of 2015, which commits to free movement of goods, services, foreign direct investment, and free flows of capital (ASEAN 2010). Hence, all ASEAN economies are open to trade and investment. With AEC, the strategy of LMB members of ASEAN is either to retain barriers with non-ASEAN partner economies (such as China) or to remove the barriers (i.e., open trade with more partners of the world). According to Petri, Plummer, and Zhai (2012), the region’s share pattern is essentially symmetric. About one quarter of overall ASEAN trade is shared within ASEAN as well with the United States, the European Union, China, and Japan, and the rest of the world. China, therefore, is considered as a partner of ASEAN and is involved with AEC only under two arrangements: (i) increased bilateral free trade area with the four LMB states (under CAFTA) where the states are members of AFTA, or (ii) bilateral free trade area with AEC (under AFTA).

To determine the trading game, the welfare gain of the LMB is defined as the aggregated gains obtained from all four LMB nations in ASEAN (for details, see Pham Do and Dinar 2014). From Figure 26.1 (trade game), one can easily see that the LMB has open trade as the dominant strategy, whereas China’s dominant strategy is CAFTA. In this game, the Nash equilibrium (CAFTA, Open) is not efficient as the total outcome is less than in (AFTA, Open). Scrutiny of the MR water game and the MR trade game suggests clearly that playing each game separately will lead to nowhere.

Figure 26.1. MR two-stage game.

Note: = Nash equilibrium Source: Authors’ illustration based

• [1] Owing to lack of data in a water game, the values of the trade game is based only on traderesults related to the four states of the LMB and China.