Regional Integration in Trade Theory

Given widespread scepticism in trade economics about the value of RECs comprised of developing countries, the formal theory of regional economic integration is critically examined in four stylized configurations. Based on the overarching logic of trade creation and diversion, the usual diagrammatic treatment of tariff effects is critically discussed in terms of its numerous shortcomings. A single-country and REC-wise diagrammatic treatment of tariffs in the presence of increasing returns is proposed to allow quantitative assessment of the arguably most promising case for South-South RECs. Building on the literature, the cases of full and incomplete specialization within a regional group are discussed to capture concentration effects. This analysis is followed by an empirical investigation of the level which African economies have achieved with regard to diversification, specialization and sophistication of products. In addition, it is depicted what drives Africa’s cross-border agricultural trade in homogeneous products, where political concerns for food security intervene. It is concluded that South-South integration may be effective and useful, but it can only function with the help of strong policy coordination.