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On the size and number of regional integration arrangements - a political economy model

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  • Andriamananjara, Soamiely
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    Abstract

    Will the current wave of regional integration arrangements lead to the world being divided into competing inward-looking trading blocs? Or will it lead to a more open multilateral trading system? Using a multi-country political economy model, and after having shown that global free trade is optimal, the author investigates the possibility of achieving it through regionalism. An outsider country considering entering a trading bloc must weight the tradeoff between the costs of opening its own market to more foreign competition and the gains from getting better access to the bloc's preferential market. The gain of access is always larger, so an outsider would always want to apply for membership in the existing bloc. If the bloc policy is open membership, its expansion would result in global free trade. But if member countries can accept or reject new members, expansion of the bloc is unlikely to yield global free trade. When deciding whether to accept or reject new member, an insider compares the gains from getting preferential access to the new member's market with the losses from having to share its original preferential market with the new member. When the bloc is small, the gains are large enough to offset the losses, so insiders are willing to accept new members. As the bloc expands, the insiders'incentive for expanding decreases, eventually to zero. If only one regional integration arrangement were allowed to form, insiders would stop accepting new members when half the world belonged to the bloc. The remaining outsiders would probably form a bloc of their own, which would lead members of the original bloc to increase its size in anticipation of the creation of the second bloc. The threat of regionalism by outsiders would foster larger regional integration arrangements. In this model, the typical sub-game perfect equilibrium would be two blocs, one of them containing roughly two-thirds of the world, the other containing roughly one-third. Even if blocs form and merge simultaneously, yielding progressively larger symmetrical blocs, they would fail to converge in a single bloc unless the external tariff were low enough. In other words, global free trade could be achieved through bloc expansion if trading blocs lowered their external tariffs when abolishing their internal tariffs.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2117.

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    Date of creation: 31 May 1999
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    Handle: RePEc:wbk:wbrwps:2117

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    Keywords: Trade Policy; Economic Theory&Research; Environmental Economics&Policies; Rules of Origin; Labor Policies; Trade Policy; Economic Theory&Research; Environmental Economics&Policies; Trade and Regional Integration; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT;

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    References

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    1. Baldwin, Richard, 1993. "A Domino Theory of Regionalism," CEPR Discussion Papers 857, C.E.P.R. Discussion Papers.
    2. Paul Krugman, 1991. "The move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
    3. Grossman, G.M. & Helpman, E., 1993. "The Politics of Free Trade Agreements," Papers 14-93, Tel Aviv.
    4. repec:fth:geneec:96.07 is not listed on IDEAS
    5. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
    6. Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
    7. James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
    8. Panagariya, Arvind & Findlay, Ronald & DEC, 1994. "A political - economy analysis of free trade areas and customs unions," Policy Research Working Paper Series 1261, The World Bank.
    9. Vaubel, Roland, 1994. "The public choice analysis of European integration: A survey," European Journal of Political Economy, Elsevier, vol. 10(1), pages 227-249, May.
    10. Cadot, Olivier & de Melo, Jaime & Olarraga, Marcelo, 1999. "Regional Integration and Lobbying for Tariffs against Nonmembers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 635-57, August.
    11. Pravin Krishna, 1998. "Regionalism And Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 227-250, February.
    12. Wei, Shang-Jin & Frankel, Jeffrey A., 1996. "Can regional blocs be a stepping stone to global free trade? a political economy analysis," International Review of Economics & Finance, Elsevier, vol. 5(4), pages 339-347.
    13. repec:fth:coluec:9596-04 is not listed on IDEAS
    14. Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
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    Cited by:
    1. Michele Fratianni & Chang Hoon Oh, 2009. "Expanding RTAs, trade flows, and the multinational enterprise," Journal of International Business Studies, Palgrave Macmillan, vol. 40(7), pages 1206-1227, September.
    2. Balogun, Emmanuel Dele, 2007. "Effects of exchange rate policy on bilateral export trade of WAMZ countries," MPRA Paper 6234, University Library of Munich, Germany.
    3. Pasadilla, Gloria O., 2004. "East Asian Cooperation: The ASEAN View," Discussion Papers DP 2004-27, Philippine Institute for Development Studies.
    4. Arvind Panagariya & Rupa Duttagupta, 2003. "Free Trade Areas and Rules of Origin: Economics and Politics," IMF Working Papers 03/229, International Monetary Fund.
    5. Michele Fratianni & Chang Hoon Oh, 2007. "On the Relationship Between RTA Expansion and Openness," Working Papers 2007-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    6. Jong Eun Lee, 2004. "The sequential issue in free trade areas: Policy implication for Korea," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 165-174.
    7. Balogun, Emmanuel Dele, 2009. "Determinants of West African Monetary Zone (WAMZ)countries global export trade: do foreign reserves and independent exchange rates matter?," MPRA Paper 12929, University Library of Munich, Germany.

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