Trade Agreements as Self-Protection

Risks that are associated with an uncertain trading world have been dealt with using two different techniques in the literature: defensive, or insurance approaches, and preventive, or self-protection approaches. Much of the earlier work centered on security issues but with the end of the Cold War attention turned toward preventive approaches. This paper argues that the incentive for loss prevention leads to some form of cooperative regional integration. Inclusion of uncertainty positively contributes to the overall customs union literature. The optimal level of integration, political or economic, is found and then simple comparative statics are used to discern the effects of some changes in the underlying parameters of the economy on that optimal level of integration. Multilateralism and regionalism are concluded to be complements. Copyright Blackwell Publishing Ltd 2005..