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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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    1. James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
    2. repec:fth:geneec:96.07 is not listed on IDEAS
    3. Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 1996. "Regional Integration and Lobbying for Tariffs Against Non-members," CEPR Discussion Papers 1448, C.E.P.R. Discussion Papers.
    4. Pravin Krishna, . "Regionalism and Multilaterialism: A Political Economy Approach," Working Papers 96-5, Brown University, Department of Economics.
    5. Grossman, Gene & Helpman, Elhanan, 1994. "The Politics of Free Trade Agreements," CEPR Discussion Papers 908, C.E.P.R. Discussion Papers.
    6. 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.
    7. Richard Baldwin, 1993. "A Domino Theory of Regionalism," NBER Working Papers 4465, National Bureau of Economic Research, Inc.
    8. Paul Krugman, 1991. "The move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
    9. 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.
    10. Bhagwati, J. & Panagariya, A., 1996. "Preferential Trading Areas and Multilateralism: Strangers, Friends or Foes?," Discussion Papers 1996_09, Columbia University, Department of Economics.
    11. repec:fth:coluec:9596-04 is not listed on IDEAS
    12. 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.
    13. 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.
    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.
    15. 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.
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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. "Exchange rate policy and export performance of WAMZ countries," MPRA Paper 6233, University Library of Munich, Germany.
    3. Rupa Duttagupta & Arvind Panagariya, 2007. "Free Trade Areas And Rules Of Origin: Economics And Politics," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 169-190, 07.
    4. 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.
    5. 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.
    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. Pasadilla, Gloria, 2004. "East Asian Cooperation: The ASEAN View," Discussion Papers DP 2004-27, Philippine Institute for Development Studies.
    8. Balogun, Emmanuel Dele, 2007. "Effects of exchange rate policy on bilateral export trade of WAMZ countries," MPRA Paper 6234, University Library of Munich, Germany.

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