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Regional Integration as Diplomacy

  • Schiff, Maurice
  • Winters, L Alan

Regional integration agreements (RIAs) are examples of second best and have an ambiguous impact on welfare, contend the authors. They build a model in which RIAs unambiguously raise welfare by correcting for externalities. It assumes that trade between neighboring countries increases trust between them and reduces the likelihood of conflict. The optimum intervention in that case is a subsidy on imports from the neighbor. The authors show that an equivalent solution is for the neighboring countries to tax imports fromthe rest of the world -that is, to form an RIA- together with imposing some domestic taxes. In fact, security threats have moved neighboring countries to form RIAs. Examples include the creation of the European Coal and Steel Community (1951) and the European Economic Community (1957) to reduce the threat of war in Europe, as well as various RIAs among developing countries. The authors show, among other things, that: 1) the optimum tariffs on imports from the rest of the world are likely to decline over time; 2) deep integration implies lower optimum external tariffs if it is exogenous; 3) but if deep integration is endogenous, it implies higher optimum external tariffs before it occurs and lower ones thereafter; and 4) enlargement of a bloc (in terms of symmetric countries) has an ambiguous impact on external tariffs but improves welfare, and some form of domino effect exists in the sense that enlargement increases the incentive for nonmembers to seek accession. Although externalities associated with security matters imply that an RIA may maximize welfare, this model suggests that the RIA is a transitory arrangement in the sense that optimum trade preferences are highest at the time the RIA is formed (when security is low) and tend to decline over time. In other words, the RIA's external trade policy becomes increasingly open over time (as well as following deep integration).

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Article provided by World Bank Group in its journal World Bank Economic Review.

Volume (Year): 12 (1998)
Issue (Month): 2 (May)
Pages: 271-95

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Handle: RePEc:oup:wbecrv:v:12:y:1998:i:2:p:271-95
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  1. Hirschman, Albert O, 1982. "Rival Interpretations of Market Society: Civilizing, Destructive, or Feeble?," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1463-84, December.
  2. 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.
  3. Smith, Alasdair, 1992. "Measuring the effects of '1992'," Discussion Papers in Economics 07/92, Department of Economics, University of Sussex.
  4. Marco López-Cerdá & Guillermo Owen & Jos Potters & Carles Raffels & E. Calvo & F. Valenciano & J. Zarzuelo, 1993. "Discussion," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 1(1), pages 36-51, December.
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