Small Hubs, Large Spokes and Overlapping Free Trade Agreements

The proliferation of overlapping free trade agreements (FTA) in recent years has led to pair-wise hub-and-spokes (HAS) throughout the world. Being avid subscribers to FTAs, many countries in the Asia-Pacific region, including the United States, Japan, Singapore, South Korea, Thailand and Australia, have become trade hubs to their partners who are in turn relegated to spoke status. In this paper, we question whether being a hub is welfare optimal for a small and open economy such as Singapore compared to membership in a single bilateral FTA or a multi-member free trade zone. Within this context, we use a computable general equilibrium model to examine the welfare implications of the triangular trade relationship of the United States, Singapore and Japan. This is facilitated by the Japan-Singapore Economic Partnership Agreement, the USA-Singapore Free Trade Agreement, and a hypothetical USA-Japan Economic Partnership Agreement. The analysis is extended to incorporate 'super-hub' effects, that is, the spoke countries could be trade hubs in other HAS systems. Our experiment reveals that hub status generates positive welfare gain and is the highest Singapore can get from the trade configurations considered. Meanwhile, Japan loses more than the USA when both are relegated to spoke status. These findings prove to be robust under different market structures and production technologies, deeper economic integration, 'super-hub' effects, as well as uncertainty in the key model parameters and the extent of trade liberalisation shocks. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd.