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A Test of Endogenous Trade Bloc Formation Theory on EU Data

Author

Listed:
  • Baldwin, Richard Edward

    () (Graduate Institute of International Studies)

  • Rieder , Roland

    () (SBB Cargo and German Daimler AG)

Abstract

This paper empirically confronts one explanation of spreading regionalism with the European experience. The domino theory asserts that forming a preferential trade area, or deepening an existing one, produces trade diversion that generates new political-economy forces in third nations as third-nation exporters seek to redress the new discrimination and profit from newly deepened preferences. The pressure increases with the bloc's size, yet bloc size depends upon how many nations join, so a single incidence of regionalism may trigger several rounds of membership requests from nations that were previously happy to stay out. We estimate a time-series of EU trade creation and diversion over the last five decades and use these to estimate a model of EU membership demands. The results provide broad support for the model and show that trade diversion has a more powerful impact on membership than trade creation.

Suggested Citation

  • Baldwin, Richard Edward & Rieder , Roland, 2007. "A Test of Endogenous Trade Bloc Formation Theory on EU Data," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 11(2), pages 77-110, December.
  • Handle: RePEc:ris:eaerev:0145
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    File URL: http://dx.doi.org/10.11644/KIEP.JEAI.2007.11.2.171
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    References listed on IDEAS

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    1. Richard E. Baldwin, 1997. "The Causes of Regionalism," The World Economy, Wiley Blackwell, vol. 20(7), pages 865-888, November.
    2. Grossman, Gene M & Helpman, Elhanan, 1995. "The Politics of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 85(4), pages 667-690, September.
    3. Roland Rieder, 2006. "Playing Dominoes in Europe: An Empirical Analysis of the Domino Theory for the EU, 1962-2004," IHEID Working Papers 11-2006, Economics Section, The Graduate Institute of International Studies, revised Jun 2006.
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    5. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-519, September.
    6. Caroline Freund, 2000. "Different Paths to Free Trade: The Gains from Regionalism," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1317-1341.
    7. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
    8. Baldwin, Richard, 1993. "A Domino Theory of Regionalism," CEPR Discussion Papers 857, C.E.P.R. Discussion Papers.
    9. I-Hui Cheng & Howard J. Wall, 2005. "Controlling for heterogeneity in gravity models of trade and integration," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 49-63.
    10. Baldwin, Richard, 2000. "Regulatory Protectionism, Developing Nations and a Two-Tier World Trade System," CEPR Discussion Papers 2574, C.E.P.R. Discussion Papers.
    11. Aghion, Philippe & Antras, Pol & Helpman, Elhanan, 2007. "Negotiating free trade," Journal of International Economics, Elsevier, vol. 73(1), pages 1-30, September.
    12. John McLaren, 2002. "A Theory of Insidious Regionalism," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 571-608.
    13. Pédussel Wu, Jennifer, 2004. "Measuring and explaining levels of regional economic integration," ZEI Working Papers B 12-2004, University of Bonn, ZEI - Center for European Integration Studies.
    14. Fernandez, Raquel & Portes, Jonathan, 1998. "Returns to Regionalism: An Analysis of Nontraditional Gains from Regional Trade Agreements," World Bank Economic Review, World Bank Group, vol. 12(2), pages 197-220, May.
    15. Mansfield, Edward D. & Reinhardt, Eric, 2003. "Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements," International Organization, Cambridge University Press, vol. 57(04), pages 829-862, September.
    16. Kym Anderson & David Norman & Glyn Wittwer, 2004. "Introduction," Chapters,in: The World's Wine Markets, chapter 1 Edward Elgar Publishing.
    17. Neal, Larry & Barbezat, Daniel, 1998. "The Economics of the European Union and the Economies of Europe," OUP Catalogue, Oxford University Press, number 9780195110685.
    18. Tammy Holmes, 2005. "What Drives Regional Trade Agreements that Work?," IHEID Working Papers 07-2005, Economics Section, The Graduate Institute of International Studies.
    19. 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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    Citations

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    Cited by:

    1. Bas Straathof & Gert Jan Linders & Arjan Lejour & Jan Möhlmann, 2008. "The internal market and the Dutch economy: implications for trade and economic growth," CPB Document 168, CPB Netherlands Bureau for Economic Policy Analysis.
    2. Baldwin, Richard & Jaimovich, Dany, 2012. "Are Free Trade Agreements contagious?," Journal of International Economics, Elsevier, vol. 88(1), pages 1-16.
    3. Feuerstein Switgard, 2013. "From the Zollverein to the Economics of Regionalism," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(3), pages 367-388, June.
    4. Baldwin, Richard, 2010. "Sequencing regionalism: Theory, European practice, and lessons for Asia," CEPR Discussion Papers 7852, C.E.P.R. Discussion Papers.
    5. Hiroshi Daisaka & Taiji Furusawa, 2014. "Dynamic Free Trade Networks: Some Numerical Results," Review of International Economics, Wiley Blackwell, vol. 22(3), pages 469-487, August.
    6. Baier, Scott L; Bergstrand, Jeffery H; Mariutto, Roland., 2010. "The Growth of Bilateralism," CAGE Online Working Paper Series 12, Competitive Advantage in the Global Economy (CAGE).

    More about this item

    Keywords

    Domino Theory; Regionalism; FTAs;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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