On the size and number of regional integration arrangements - a political economy model
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.
|Date of creation:||31 May 1999|
|Date of revision:|
|Contact details of provider:|| Postal: 1818 H Street, N.W., Washington, DC 20433|
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Grossman, Gene & Helpman, Elhanan, 1994.
"The Politics of Free Trade Agreements,"
CEPR Discussion Papers
908, C.E.P.R. Discussion Papers.
- Grossman, G.M. & Helpman, E., 1993. "The Politics of Free Trade Agreements," Papers 166, Princeton, Woodrow Wilson School - Public and International Affairs.
- Grossman, G.M. & Helpman, E., 1993. "The Politics of Free Trade Agreements," Papers 14-93, Tel Aviv.
- Gene M. Grossman & Elhanan Helpman, 1993. "The Politics of Free Trade Agreements," NBER Working Papers 4597, National Bureau of Economic Research, Inc.
- 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 635-57, August.
- Cadot, O. & De Melo, J. & Olarreaga, M., 1996. "Regional Integration and Lobbying for Tariffs Against Non-Members," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva 96.08, Institut d'Economie et Econométrie, Université de Genève.
- Cadot, Olivier & de Melo, Jaime & Olarreaga, Marcelo, 1996. "Regional Integration and Lobbying for Tariffs Against Non-members," CEPR Discussion Papers 1448, C.E.P.R. Discussion Papers.
- Wei, Shang-Jin & Frankel, Jeffrey A., 1996. "Can regional blocs be a stepping stone to global free trade? a political economy analysis," International Review of Economics & Finance, Elsevier, vol. 5(4), pages 339-347.
- Paul R. Krugman, 1991.
"The move toward free trade zones,"
Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
- Paul R. Krugman, 1991. "The move toward free trade zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-58.
- Richard Baldwin, 1993.
"A Domino Theory of Regionalism,"
NBER Working Papers
4465, National Bureau of Economic Research, Inc.
- Vaubel, Roland, 1994. "The public choice analysis of European integration: A survey," European Journal of Political Economy, Elsevier, vol. 10(1), pages 227-249, May.
- Brander, James & Krugman, Paul, 1983.
"A 'reciprocal dumping' model of international trade,"
Journal of International Economics,
Elsevier, vol. 15(3-4), pages 313-321, November.
- James A. Brander & Paul Krugman, 1983. "A 'Reciprocal Dumping' Model of International Trade," NBER Working Papers 1194, National Bureau of Economic Research, Inc.
- James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
- James Brander & Paul Krugman, 1982. "A 'Reciprocal Dumping' Model of International Trade," Working Papers 513, Queen's University, Department of Economics.
- Bond, Eric W. & Syropoulos, Constantinos, 1996. "The size of trading blocs Market power and world welfare effects," Journal of International Economics, Elsevier, vol. 40(3-4), pages 411-437, May.
- Panagariya, Arvind & Findlay, Ronald & DEC, 1994. "A political - economy analysis of free trade areas and customs unions," Policy Research Working Paper Series 1261, The World Bank.
- Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-19, September.
- Sang-Seung, Yi, 1996. "Endogenous formation of customs unions under imperfect competition: open regionalism is good," Journal of International Economics, Elsevier, vol. 41(1-2), pages 153-177, August.
- repec:fth:geneec:96.07 is not listed on IDEAS
- Pravin Krishna, 1998. "Regionalism and Multilateralism: A Political Economy Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 227-251.
When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:2117. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)
If references are entirely missing, you can add them using this form.