Regionalism And Multilateralism
SESSION V
REGIONALISM AND
THE MULTILATERAL TRADING SYSTEM
JAIME DE MELO
This version, April 5, 2004
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Regionalism And Multilateralism
OUTLINE: SESSION V
 Relation of regionalism to multilateralism: static and
dynamic issues
 Regionalism and Tariff levels
 Trade Blocs and excluded countries
 Domino Regionalism
 Regionalism as Insurance
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Regionalism And Multilateralism
THE TWO WAVES OF RIAs
(from Overview)
RIAS Notifications to the GATT/WTO
25
20
15
10
1997
1991
1976
1970
1961
1949
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Regionalism And Multilateralism
 MAIN ISSUES
What makes Regional Integration Agreements (RIAs)
suddenly so popular? Should one worry (relation to
the multilateral system)?
 Is regionalism an insurance policy if the WTS goes
awry?
 Have RIAs led to increases in protection against nonmembers?
 How does regionalism affect the WTS?
These issues can be summarized in the paths for
world welfare under the different scenarios below
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Regionalism And Multilateralism
 RELATION TO MULTILATERALISM (are RIAs desirable ?)
Two strategies towards world trade liberalization:
Multilateralism (M) or Regionalism (R)?
1. Static considerations:
- M is non-discriminatory  welfare (U) (paths M(1)
and M(2) in figure below)
- R may increase or decrease world welfare (paths
R(2) vs R(1) in figure below)
2. Dynamic issues:
- M becomes uncertain:see difficulties to launch the
millenium round (paths M(1) or M(2))
- R is uncertain too! (less members and deeper
integration are positive factors (path R(3)), but
between them RIA blocs may remain protectionist)
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Regionalism And Multilateralism
ARE RIAs DESIRABLE ?: GRAPHICAL ANALYSIS
U
L
R(3)
M(2)
M(1)
U2R
R(2)
U0
U1
R(1)
R
time
0
t0
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Regionalism And Multilateralism
OTHER ISSUES AND CONTROVERSIES
 Does regionalism go hand in hand with multilateral
trade liberalization (MTL) or does it work at crosspurposes, i.e. does sufficiently deep regionalism
reduce the incentives of members to participate in
further multilateral trade negotiations?
 Would a world organized in a few trading blocks (the
“triad”) hurt those left out?
 Would a world organized in a few trading blocks (the
“triad”) hurt those left out?
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Regionalism And Multilateralism
 Regionalism and Tariff levels
In spite of the waves of RIAs, tariffs still significant
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Regionalism And Multilateralism
Regionalism and Tariff levels
The table below (See S-W box 8.3 for details) tries to compare
openness and tariff changes in “significant” RIA members with
non-significant or “non-RIA” countries.
(Box 8.3, contd.) Average Tariffs in RIA Members and Other Countries (a)
Average Tariffs (%)
“non-RIA”
“RIA” Countries
Countries
1981-85 1990-94 1981-85 1990-94
Countries in
North-South
RIAs
20.6
10.2
Latin America
Africa
31.0
35.6
13.8
31.0
South Asia
East Asia
Middle East/
North Africa
25.8
30.7
15.4
24.4
59.9
20.5
26.3
Openness (%) (b)
“non-RIA”
“RIA” Countries
Countries
1980-84 1990-94 1980-84 1990-94
19
22
26
47
30
45
174
40
107
48
41.8
15.0
22
43
30
68
26.6
40
43
No increase in protectionism in RIA countries. RIAs could also
have helped lock in previous reforms, but many caveats
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Regionalism And Multilateralism
 Effects on third countries
Figure 8.1: Average Prices of Brazil's Imports
from Argentina relative to those of Imports from
the United States
MERCOSUR: CU (Argentina,
Brazil, Uruguay, Paraguay)
 TOT of US for 1356
manufactures sold to Brazil
and to ROW
 Absolute and relative
decline in TOT !!!
Can you explain why?
Average price
ratio (% percent
difference from
1990)
As expected by theory, but need
next graph that isolates effects of
Brazil on US exports
10
0
1990
1991
1992
1993
1994
1995
1996
-10
year
Figure 8.2 US Export Prices (1991-1996)
1,356 commodities
Average Prices (% difference
from 1991)
Went into effect in 1995
20
15
10
5
0
-5
1991
1992
1993
1994
1995
1996
-10
-15
to Brazil
to Rest of World
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Regionalism And Multilateralism
 Effects on third countries (Mercosur end)
Same effect for
Korea (but with
less commodities)
Still after
controlling for
exchange rates
and other factors,
result holds
…rather convincing evidence that for manufactures
(differentiated products), preferential trade liberalization
lowers prices or excluded countries.
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Regionalism And Multilateralism
 Domino Regionalism (I)
…. May be best not to be left in the cold when
regionalism is spreading (the excluded effect on profits
seen earlier) but does this make regionalism a good
thing?
Below results of a Cournot model where each bloc
maximizes welfare (i.e. chooses welfare maximizing
tariffs, taking other bloc’s policy as given)
There are no transport costs within continents (blocs
are formed within continents) and positive trading
costs across continents.
At the start each country has an MFN ,and there are 4
continents.
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Regionalism And Multilateralism
 Domino Regionalism (II)
…. Initially each continent can improve its welfare by
improving its TOT as others lower prices to mitigate loss of
competitiveness. Second continent, joins and converts a loss
to a gain, third converts loss into lesser one.
Welfare relative to nondiscrimination
Figure 8.4 Domino Regionalism
3
2
1
0
-1
-2
-3
-4
Inside
Outside
0
1
2
3
4
World
Number of Blocs
…. When all are in an RIA, they are worse off than under MFN.
Not robust to asymmetric blocs, but still poses a question on
‘stepping bloc’ vs. ‘stumbling bloc’
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Regionalism And Multilateralism
Same form of RIA
Table 8.4 Domino Regionalism
Strong Expansion
EU (ex-EC): 1957: BeNeLux, France, Germany, Italy; 1973:
Denmark, Ireland, UK; 1981: Greece; 1986: Portugal, Spain;
1995: Austria, Finland, Sweden; and plan to include the
CEECs and some Mediterranean island countries.
CUSFTA: 1989: Canada, US; becoming NAFTA by including
Mexico: 1994; and possible expansion to FTAA.
APEC: 1989: Australia, Brunei Darussalam, Canada, Indonesia,
Japan, the Republic of Korea, Malaysia, New Zealand, Rep. of
the Philippines, Singapore, Thailand, United States; 1991:
People’s Republic of China, Taiwan (China), Hong Kong
(China); 1993: Mexico, Papua New Guinea; 1994: Chile; 1998:
Peru, Russia, Vietnam.
CARICOM: 1973: Antigua and Barbuda, Barbados, Jamaica, St.
Kitts and Nevis, Trinidad and Tobago;1974:Belize, Dominica,
Grenada, Montserrat, St. Lucia, St. Vincent and the Grenadines;
1983: The Bahamas (part of the Caribbean Community but not
of the Common Market).
Weaker form of regionalism
Intermediate
Expansion
No
Expansion
EuroMediterranea
n Agreement:
FTAs between
EU and
Mediter.
countries.
Andean
Pact,
CACM,
G3,
CBI,
EAC,
ECOWAS,
COMESA,
IOC,
SACU,
CEPGL,
Arab
Common
Market,
GCC,
SAARC.
FTAs between
EU and
Mexico, EU
and Chile, etc.
FTA between
MERCOSUR
and Chile, and
between
MERCOSUR
and Bolivia.
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UDEAC: 1966: Cameroon, Central African Republic, Chad,
Congo, Gabon; 1989: Equatorial Guinea.
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Regionalism And Multilateralism
Table 8.4 Domino Regionalism (continued)
Strong Expansion
Intermediate
Expansion
No
Expansion
SADC: 1980: Angola, Botswana, Lesotho, Malawi,
Mozambique, Swaziland, Tanzania, Zambia, Zimbabwe;
1990: Namibia; 1994: South Africa; 1995: Mauritius; 1998:
Democratic Republic of the Congo, Seychelles.
UEMOA: 1994: Benin, Burkina Faso, Côte d’Ivoire, Mali,
Niger, Senegal, Togo, 1997: Guinea-Bissau.
CEFTA: 1993:1996: Czech Republic, Hungary, Poland,
Slovak Republic, Slovenia; 1997: Romania; 1988: Bulgaria.
AFTA: 1992, Indonesia, Malaysia, Philippines, Singapore,
Thailand; 1984: Brunei Darussalam; 1995: Vietnam; 1997:
Myanmar, Lao People’s Democratic Republic; 1999:
Cambodia.
…but when the size of RIAs is taken into account, expanding RIAs
dominate strongly, …the larger the bloc, the more costly it is to stay
out of it (this is largely why the Nordic countries joined the EU)
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Regionalism And Multilateralism
 Regionalism as Insurance
Simulation model (with real trade data) where one
region, ROW, does not get into a ‘trade war’= set tariff
that maximizes your bloc’s income taking the other
blocs tariffs as given.
…only illustrative since tariffs are GATT-bound but still
it is a proxy for what ‘insurance’ from being in a bloc
might buy.
Clearly, Canada and Mexico do better if while the six
regions fight the war if they are in a CU with the US.
The same applies to other Western Europe if they were
in a CU including the US and EU.
 If we had FTAs instead of CUs, there would be less
welfare loss from being outside since countries would not
coordinate to exploit TOT gains.
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Regionalism And Multilateralism
Box 8.5 Insurance Policies
LOSSES OF ECONOMIC WELFARE AS % OF GDP RELATIVE TO 1986
(Equivalent Variations)
Trade War With:
No CUs
Canada-US CU
North
America CU
North
AmericaEurope CU
1.2
0.5
-0.4
0.5
Canada
-25.5
0.9
0.4
-0.7
Mexico
-8.5
-8.5
0.1
-0.3
Japan
-5.2
-5.2
-5.2
-5.4
EC (12)
3.7
3.4
3.4
2.5
Other Western Europe
-32.2
-33.1
-33.5
10.1
The rest of the world
-10.6
-10.9
-11.1
-13.4
World Total
-6.0
-5.8
-5.8
-6.2
US
Source: Whalley (1998)—See S-W box 8.5 for further explanations
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