Regional integration, old and new

After lying dormant for two decades, regional integration is on the rise. Recent initiatives suggest that the world trading system may be moving toward three trading blocs clustered around Japan, the European Community, and the United States. Some view this development as a move toward a less fragmented world trading system; others, as a threat to multilateralism. For a typical developing country, the issue is whether to enter into a regional integration arrangement or to choose unilateral trade liberalization. Two questions must be asked: Is a preferential approach likely to enhance economic efficiency? And are substantial benefits attainable more easily through regionalism or through unilateral trade liberalization? The authors address these issues first by reviewing past and recent regional integration arrangements. They note that recent arrangements are occurring in a more liberal trading environment than those in the past, and that developing countries are now seeking integration with developed country partners (for example, Mexico and the United States). So the context is different from past arrangements, when regional integration was viewed as an extension of import-substitution industrialization at the regional level. In a discussion of the welfare economics of preferential trading arrangements, they show that a preferential approach to trade liberalization may not increase welfare. For a small country, unilateral trade liberalization will be superior to a preferential approach unless the world divides into trading blocs with mutually high barriers - in which case, a preferential approach ensures market access. In a discussion of the welfare economics of trading blocs, they note that the move to a few trading blocs may make a cooperative solution more likely - at the same time increasing the rewards of noncooperative behavior if bargaining fails. With an empirical evaluation, the authors show that - after controlling for differences in investment - countries that integrated grew no faster than their comparator group. But human capital contributes significantly to growth, suggesting benefits from regional integration arrangements that emphasize cooperation. And there is evidence of catch-up, suggesting benefits for the least-developed members of the new wave of arrangements that emphasize North-South membership. In short, regional integration arrangements are more likely to be a stepping stone toward a freer world trading system if GATT rules are strengthened, and if developing countries enter into arrangements with developed rather than other developing countries.