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Regional integration as diplomacy

Author

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  • Schiff, Maurice
  • Winters, L. Alan

Abstract

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).

Suggested Citation

  • Schiff, Maurice & Winters, L. Alan, 1997. "Regional integration as diplomacy," Policy Research Working Paper Series 1801, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1801
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    References listed on IDEAS

    as
    1. Hirschman,Albert O., 1981. "Essays in Trespassing," Cambridge Books, Cambridge University Press, number 9780521282437, December.
    2. Steve Chan, 1984. "Mirror, Mirror on the Wall..," Journal of Conflict Resolution, Peace Science Society (International), vol. 28(4), pages 617-648, December.
    3. 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;Sociedad de Estadística e Investigación Operativa, vol. 1(1), pages 36-51, December.
    4. repec:fth:geneec:96.07 is not listed on IDEAS
    5. Smith, Alasdair, 1992. "Measuring the effects of '1992'," Discussion Papers in Economics 07/92, Department of Economics, University of Sussex.
    6. Cadot, Olivier & de Melo, Jaime & Olarraga, Marcelo, 1999. "Regional Integration and Lobbying for Tariffs against Nonmembers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 635-657, August.
    7. Hirschman, Albert O, 1982. "Rival Interpretations of Market Society: Civilizing, Destructive, or Feeble?," Journal of Economic Literature, American Economic Association, vol. 20(4), pages 1463-1484, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Rules of Origin; Environmental Economics&Policies; Economic Theory&Research; Payment Systems&Infrastructure; Trade Policy; Trade Policy; Environmental Economics&Policies; Economic Theory&Research; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Trade and Regional Integration;

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F15 - International Economics - - Trade - - - Economic Integration

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