Working Paper: CEPR ID: DP857
Authors: Richard Baldwin
Abstract: Regional liberalization sweeps the globe like wildfire while multilateral trade talks proceed at a glacial pace. Why are countries eager to liberalize regionally but reluctant to do so multilaterally? The answer of the GATT-is-dead school is that multilateralism is too cumbersome for contemporary trade issues. This paper proposes a very different answer. Recent regionalism is caused by two idiosyncratic events multiplied by a domino effect. The triggering events the US-Mexico FTA and the European Community's 1992 programme had nothing to do with GATT's health. The domino effect is simple. Political equilibria, which balance anti- and pro-membership forces, determine governments' stances on regional liberalization. Domestic exporters to regional blocs are a powerful pro-membership constituency. An event that triggers closer integration within an existing bloc reduces the profits of non-member exporters, inducing them to boost their pro-membership political activity. The extra activity alters the political equilibrium, leading some countries to join. This enlargement further harms non-member exporters since they now face a disadvantage in a greater number of markets. This second-round effect brings forth more pro-membership political activity and a further enlargement of the bloc. The new political equilibrium is marked by larger regional trading blocs. In the meantime regionalism appears to spread like wildfire.
Keywords: regionalism; political economy; european integration; nafta
JEL Codes: F01; F13; F15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US-Mexico FTA (F15) | regional liberalization (F15) |
| EC's 1992 program (O52) | regional liberalization (F15) |
| triggering event (Y60) | political equilibrium (pro-membership constituency) (D72) |
| political equilibrium (pro-membership constituency) (D72) | profits for non-member exporters (F10) |
| profits for non-member exporters (F10) | political activity advocating for membership (D72) |
| political activity advocating for membership (D72) | governmental stance on joining the bloc (F55) |
| increased membership requests (D71) | competitive disadvantage for non-members (L49) |
| competitive disadvantage for non-members (L49) | pro-membership lobbying (L44) |