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On the size and number of regional integration arrangements - a political economy model

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  • Andriamananjara, Soamiely

Abstract

Will the current wave of regional integration arrangements lead to the world being divided into competing inward-looking trading blocs? Or will it lead to a more open multilateral trading system? Using a multi-country political economy model, and after having shown that global free trade is optimal, the author investigates the possibility of achieving it through regionalism. An outsider country considering entering a trading bloc must weight the tradeoff between the costs of opening its own market to more foreign competition and the gains from getting better access to the bloc's preferential market. The gain of access is always larger, so an outsider would always want to apply for membership in the existing bloc. If the bloc policy is open membership, its expansion would result in global free trade. But if member countries can accept or reject new members, expansion of the bloc is unlikely to yield global free trade. When deciding whether to accept or reject new member, an insider compares the gains from getting preferential access to the new member's market with the losses from having to share its original preferential market with the new member. When the bloc is small, the gains are large enough to offset the losses, so insiders are willing to accept new members. As the bloc expands, the insiders'incentive for expanding decreases, eventually to zero. If only one regional integration arrangement were allowed to form, insiders would stop accepting new members when half the world belonged to the bloc. The remaining outsiders would probably form a bloc of their own, which would lead members of the original bloc to increase its size in anticipation of the creation of the second bloc. The threat of regionalism by outsiders would foster larger regional integration arrangements. In this model, the typical sub-game perfect equilibrium would be two blocs, one of them containing roughly two-thirds of the world, the other containing roughly one-third. Even if blocs form and merge simultaneously, yielding progressively larger symmetrical blocs, they would fail to converge in a single bloc unless the external tariff were low enough. In other words, global free trade could be achieved through bloc expansion if trading blocs lowered their external tariffs when abolishing their internal tariffs.

Suggested Citation

  • Andriamananjara, Soamiely, 1999. "On the size and number of regional integration arrangements - a political economy model," Policy Research Working Paper Series 2117, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2117
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    References listed on IDEAS

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    Cited by:

    1. Chang Hoon Oh & Michele Fratianni, 2010. "Do Additional Bilateral Investment Treaties Boost Foreign Direct Investments?," Mo.Fi.R. Working Papers 43, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    2. repec:spr:manint:v:52:y:2012:i:4:d:10.1007_s11575-011-0127-7 is not listed on IDEAS
    3. Findlay, Christopher C., 2002. "Walking and chewing gum at the same time: Australia’s free trade area strategy," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 46(4), December.
    4. Michele Fratianni & Chang Hoon Oh, 2009. "Expanding RTAs, trade flows, and the multinational enterprise," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 40(7), pages 1206-1227, September.
    5. Balogun, Emmanuel Dele, 2007. "Exchange rate policy and export performance of WAMZ countries," MPRA Paper 6233, University Library of Munich, Germany.
    6. Michele Fratianni & Chang Hoon Oh, 2009. "Size of regional trade agreements and regional trade bias," Applied Economics Letters, Taylor & Francis Journals, vol. 16(16), pages 1603-1606.
    7. Rupa Duttagupta & Arvind Panagariya, 2007. "Free Trade Areas And Rules Of Origin: Economics And Politics," Economics and Politics, Wiley Blackwell, vol. 19(2), pages 169-190, July.
    8. repec:brc:brccej:v:3:y:2018:i:1:p:15-23 is not listed on IDEAS
    9. Christopher Findlay, 2001. "Old Issues in New Regionalism," Asia Pacific Economic Papers 311, Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University.
    10. P. K. M. Tharakan, 2006. "Storm Signals: An Analysis of the Trade Policy Review of the European Communities," The World Economy, Wiley Blackwell, vol. 29(10), pages 1301-1310, October.
    11. Sklias, Pantelis & Tsampra, Maria, 2012. "Towards an analytical framework of regional integration in Western Balkans," MPRA Paper 36504, University Library of Munich, Germany.
    12. Michele FRATIANNI & Chang HOON HO, 2007. "On the Relationship Between RTA Expansion and Openness," Working Papers 288, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    13. Pantelis Sklias, 2011. "The political economy of regional integration in the Western Balkans," International Journal of Business and Economic Sciences Applied Research (IJBESAR), Eastern Macedonia and Thrace Institute of Technology (EMATTECH), Kavala, Greece, vol. 4(3), pages 21-37, December.
    14. Soamiely Andriamananjara, 2003. "Competitive Liberalization or Competitive Diversion? The Relationship between Preferential Trade Agreements and the Multilateral Trading System," International Trade 0305002, EconWPA.
    15. Balogun, Emmanuel Dele, 2009. "Determinants of West African Monetary Zone (WAMZ)countries global export trade: do foreign reserves and independent exchange rates matter?," MPRA Paper 12929, University Library of Munich, Germany.
    16. Jong Eun Lee, 2004. "The sequential issue in free trade areas: Policy implication for Korea," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(2), pages 165-174.
    17. Arvind Panagariya, 2000. "Preferential Trade Liberalization: The Traditional Theory and New Developments," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 287-331, June.
    18. Pasadilla, Gloria O., 2004. "East Asian Cooperation: The ASEAN View," Discussion Papers DP 2004-27, Philippine Institute for Development Studies.
    19. repec:wsi:serxxx:v:57:y:2012:i:04:n:s0217590812500300 is not listed on IDEAS
    20. Balogun, Emmanuel Dele, 2007. "Effects of exchange rate policy on bilateral export trade of WAMZ countries," MPRA Paper 6234, University Library of Munich, Germany.

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    Keywords

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

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