Working Paper: NBER ID: w4465
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 U.S.-Mexico FTA and the EC'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 harms the profits of nonmember exporters, thus stimulating them to boost their pro-membership political activity. The extra activity alters the political equilibrium, leading some countries to join. This enlargement further harms nonmember 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; trade liberalization; political economy
JEL Codes: F15; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US-Mexico Free Trade Agreement (F13) | pro-membership lobbying by countries in the region (F55) |
| pro-membership lobbying by countries in the region (F55) | new trade agreements (F13) |
| European Community's 1992 program (F15) | membership seeking by non-member exporters (F10) |
| membership seeking by non-member exporters (F10) | new trade agreements (F13) |
| US-Mexico Free Trade Agreement (F13) | regional liberalization (F15) |
| European Community's 1992 program (F15) | regional liberalization (F15) |