Regional integration arrangements : static economic theory, quantitative findings, and policy guidelines

Source: RePEc

ABSTRACT The author reviews the static theory of regional integration arrangements, identifying and analyzing the impact of such arrangements on the trade and welfare of member countries, nonmember countries, and the world at large. He develops eight policy guidelines that apply mainly to small trading countries unable to influence their international terms of trade or to cease trading entirely with nonmember countries, assuming increasing cost conditions in member countries, homogeneous traded goods, and perfect competition. The guidelines advise establishing regional facilities for compensatory lump-sum transfers or other intrabloc payments to avoid the possibility that, where a trading bloc would be welfare-improving overall, the bloc would not be formed because of the (justified) recalcitrance of one or more would-be member countries whose economic welfaremight be reduced by the adoption of the regional trade arrangement. Other guidelines are appropriate on commonsense grounds. For example: Regional trade arrangements will be welfare-improving if they are formed by countries that are predominantly least-cost producers of exportable, or if they give rise to increased imports from all trading partners. Yet few if any extant customs unions or free trade areas meet such simple guidelines fully. To some extent, customs unions and free trade areas are expected to result in cessation of trade (in homogeneous goods) with nonmember countries. Where trade between member countries and nonmember countries is expected to continue under regional arrangements ( as real-world data suggest), internationally determined terms of trade rather than regionally determined terms of trade are likely to prevail within the trading bloc, limiting the welfare-improving effects of creating trade but not the welfare-reducing effects of trade diversion. Among the most interesting and arguably"operational"policy guidelines to emerge from the author's analysis are those concerning countries that might choose to join 1) a large rather than small regional trading bloc, 2) a regional integration arrangement to overcome hindrances facing exports to third countries, or 3) a regional integration arrangement that could have strong pro-competitive effects under imperfect competition and increasing returns to scale. Guidelines 1 and 2 concern mostly developing countries, guideline 3 concerns mostly advanced countries. But the economic bases for the three guidelines are relevant and compelling.

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    ABSTRACT: We surveyed the empirical literature using multi–country computable general equilibrium (CGE) models to analyse potential and actual regional trade agreements (RTAs). The studies indicate that these RTAs improve welfare, that trade creation greatly exceeds trade diversion, and that they are consistent with further global liberalisation. The welfare gains are bigger when models incorporate aspects of “new trade theory” such as increasing returns, imperfect competition, and links between trade liberalisation, total factor productivity growth, and capital accumulation. We also conjectured that an RTA expands market size and stability, allowing firms to pursue economies of fine specialisation, generating additional “Smithian” efficiency gains.
    Australian Journal of Agricultural and Resource Economics 11/2002; 46(4):585 - 604. · 1.42 Impact Factor
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    ABSTRACT: In this paper, we review the debate on new regionalism, focusing on the tools used to evaluate regional trade agreements (RTAs). We find that much analysis uses tools from old trade theory in the Viner-Meade tradition, focusing on trade creation, trade diversion, and terms-of-trade effects. These tools are adequate for the analysis of the effects of removing commodity trade barriers (shallow integration), but the comfortable Viner-Meade framework misses many of the impacts associated with new regionalism, which typically involves deep integration, often between developing and developed countries. A framework for analyzing new regionalism should include dynamic changes such as trade-productivity links and endogenous growth theory, international factor mobility, the role of imperfect competition, rent seeking behavior, and political-economy considerations such as potential conflicts between regionalism and multilateralism. Agriculture poses problems for new regionalism because of high tariffs, the use of domestic subsidies and entrenched special interest groups, but the role of trade liberalization on its productivity is often overlooked. For developing countries, a crucial issue is whether and how regionalism can be part of a successful development strategy. While new trade theory is concerned with a number of the issues relevant to new regionalism, and is providing new tools, the work is eclectic and is far from providing a unified framework for empirical analysis of new regionalism. Both theoretical and empirical research is needed to improve the reach and scope of new trade theory applied to issues of new regionalism. ii TABLE OF CONTENTS 1.
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    ABSTRACT: Much of the debate over whether or not developing countries gain from regional trade agreements (RTA's) has focused on two characteristics that are common to developing countries: their relatively high tariffs and their high trade dependencies on one or a few developed trade partners. In this paper, we address a third common characteristic: their use of distorting domestic policies that are closely linked to trade restrictions. We argue that participation in an RTA can create pressures for domestic policy reforms. We analyze the case of a small country, Mexico, forming an RTA with two larger countries, the U.S. and Canada, in the North American Free Trade Agreement (NAFTA). Mexico exhibits all three characteristics of a developing country: relatively high tariffs, a high trade dependency on the U.S., and an extensive and pervasive system of farm support that was linked to the restriction of trade. For the analysis, we use a 26- sector, multi-country, computable general equilibrium (CGE) model in which the three single- country models are linked through trade flows, and farm programs are modeled in detail. We find that there are welfare gains from trade liberalization in all three countries only when domestic reforms are in place. Mexico gains from NAFTA only when it also removes domestic distortions in agriculture. Then, agriculture can generate allocative efficiency gains that are large enough to offset the terms of trade losses which arise because Mexico has higher initial tariffs than other RTA members.