The new regionalism and the threat of protectionism

Drawing on the game theory concepts, the authors discuss why countries form themselves into trading blocs and what the relations between these blocs are likely to be. They identify three types of regimes: (a) unilateral trade policies - which are noncooperatives; (b) multilateral agreements (such as the GATT) - which are cooperatives; and (c) coalitions (regional integration arrangements or minilateral agreements) - which are mixed (cooperative internally and noncooperatives externally). The authors argue that regional integration arrangements can work better than global rules as precommitment devices for internally cooperative policies because they create a denser network or interlinked policy targets. The losses for a participant ostracized (or disciplined) by his bloc are immediate and tangible. Crucial to the results of analysis is the external policy stance adopted by each bloc after it has formed. External relations will determine whether regional blocs are welfare-improving, consistent with the aims of the GATT, and a vehicle for securing commitments or the regime; or whether theywill become a vehicle for spreading"political economy biases."Should higher or lower external barriers be expected for nonmembers? That depends on how large the benefits or costs, in trade and investment creation (or diversion), would be to members if the mover to free trade within the bloc is not accompanied by any increase in the bloc's external barriers (an"open"bloc). Widening tends to be easier the more open a bloc is, since insiders are less concerned with the erosion of their preferences. In the alternative scenario, lower intra-bloc trade and investment barriers are accompanied by an increase in the external barriers, giving any specific set of potential participants strong incentives to join (a"closed"bloc)."Deepening"by expanding the list of variables covered by the trade agreement also tends to make the bloc more cohesive. In both cases - a closed bloc or deep integration - greater cohesion is obtained at the cost of increasing the costs of entry for nonmembers. The hope that regional integration arrangements can pave the way for global free trade is unrealistic. As regional integration arrangements enlarge, they may be better off exerting market power against outsiders rather than following a globally cooperative path. Inter-bloc trade relations will ultimately depend on how effective special interest groups are at distorting bloc-wide trade policies that suit their interests. A multilateral trade system inhibits noncooperative behavior among trading blocs. The successful conclusion of the Uruguay Round extended and deepened the network of variables covered by multilateral rules. For developing countries, a working (even imperfect) multilateral trade system remains the best hope against excesses by those with market power.