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Regional integration arrangements : static economic theory, quantitative findings, and policy guidelines

Author

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  • DeRosa, Dean A.

Abstract

The author reviews the static theory of regional integration arrangements, identifying and analyzing the impact of such arrangements on the trade and welfare of member countries, nonmember countries, and the world at large. He develops eight policy guidelines that apply mainly to small trading countries unable to influence their international terms of trade or to cease trading entirely with nonmember countries, assuming increasing cost conditions in member countries, homogeneous traded goods, and perfect competition. The guidelines advise establishing regional facilities for compensatory lump-sum transfers or other intrabloc payments to avoid the possibility that, where a trading bloc would be welfare-improving overall, the bloc would not be formed because of the (justified) recalcitrance of one or more would-be member countries whose economic welfaremight be reduced by the adoption of the regional trade arrangement. Other guidelines are appropriate on commonsense grounds. For example: Regional trade arrangements will be welfare-improving if they are formed by countries that are predominantly least-cost producers of exportable, or if they give rise to increased imports from all trading partners. Yet few if any extant customs unions or free trade areas meet such simple guidelines fully. To some extent, customs unions and free trade areas are expected to result in cessation of trade (in homogeneous goods) with nonmember countries. Where trade between member countries and nonmember countries is expected to continue under regional arrangements ( as real-world data suggest), internationally determined terms of trade rather than regionally determined terms of trade are likely to prevail within the trading bloc, limiting the welfare-improving effects of creating trade but not the welfare-reducing effects of trade diversion. Among the most interesting and arguably"operational"policy guidelines to emerge from the author's analysis are those concerning countries that might choose to join 1) a large rather than small regional trading bloc, 2) a regional integration arrangement to overcome hindrances facing exports to third countries, or 3) a regional integration arrangement that could have strong pro-competitive effects under imperfect competition and increasing returns to scale. Guidelines 1 and 2 concern mostly developing countries, guideline 3 concerns mostly advanced countries. But the economic bases for the three guidelines are relevant and compelling.

Suggested Citation

  • DeRosa, Dean A., 1998. "Regional integration arrangements : static economic theory, quantitative findings, and policy guidelines," Policy Research Working Paper Series 2007, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2007
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    References listed on IDEAS

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    1. Lawrence H. Summers, 1991. "Regionalism and the world trading system," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 295-301.
    2. Srinivasan, T. N., 1997. "The common external tariff of a customs union: Alternative approaches," Japan and the World Economy, Elsevier, vol. 9(4), pages 447-465, December.
    3. Smith, Alasdair & Venables, Anthony J., 1988. "Completing the internal market in the European Community : Some industry simulations," European Economic Review, Elsevier, vol. 32(7), pages 1501-1525, September.
    4. Yeats,Alexander James, 1997. "Does Mercosur's trade performance raise concerns about the effects of regional trade arrangements?," Policy Research Working Paper Series 1729, The World Bank.
    5. Winters, L. Alan, 1984. "Separability and the specification of foreign trade functions," Journal of International Economics, Elsevier, vol. 17(3-4), pages 239-263, November.
    6. Leonard Waverman, 1992. "Mini-Symposium: Modelling North American Free Trade: Editorial Introduction," The World Economy, Wiley Blackwell, vol. 15(1), pages 1-10, January.
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    Cited by:

    1. Ibarra-Yunez, Alejandro, 2003. "Spaghetti regionalism or strategic foreign trade: some evidence for Mexico," Journal of Development Economics, Elsevier, pages 567-584.
    2. Nlemfu Mukoko, Jean Blaise & Wabenga Yango, James, 2011. "Zone de libre échange de la sadc et économie de la RDCongo :Création de commerce et Bien-être?
      [Implications of joining the SADC Free Trade Agreement on the D.R.Congo economy]
      ," MPRA Paper 65050, University Library of Munich, Germany, revised Jun 2015.
    3. Nlemfu Mukoko, Jean Blaise & Wabenga Yango, James, 2012. "Analyse de l'économie congolaise à travers la matrice de comptabilité sociale de 2005
      [Analysis of the D.R.Congo economy through the social accounting matrix of the year 2005]
      ," MPRA Paper 65037, University Library of Munich, Germany, revised Jun 2015.

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