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SESSION V REGIONALISM AND THE MULTILATERAL
TRADING SYSTEM
JAIME DE MELO
This version, April 5, 2004
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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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?THE TWO WAVES OF RIAs (from Overview)
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? 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
  non-members?
• 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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? RELATION TO MULTILATERALISM (are RIAs desirable
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Two strategies towards world trade
liberalization Multilateralism (M) or
Regionalism (R)?
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ARE RIAs DESIRABLE ? GRAPHICAL ANALYSIS
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OTHER ISSUES AND CONTROVERSIES
? Does regionalism go hand in hand with
multilateral trade liberalization (MTL) or does
it work at cross-purposes, 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 Tariff levels In spite of the
waves of RIAs, tariffs still significant
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• 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.

No increase in protectionism in RIA countries.
RIAs could also have helped lock in previous
reforms, but many caveats
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? Effects on third countries
MERCOSUR CU (Argentina, Brazil, Uruguay,
Paraguay) Went into effect in 1995 As expected by
theory, but need next graph that isolates effects
of Brazil on US exports
? TOT of US for 1356 manufactures sold to Brazil
and to ROW ? Absolute and relative decline in TOT
!!! Can you explain why?
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? 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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? 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 blocs 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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? 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.
. 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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Same form of RIA
Table 8.4 Domino Regionalism
Weaker form of regionalism
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Table 8.4 Domino Regionalism (continued)
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 as Insurance

• Simulation model (with real trade data) where one
  region, ROW, does not get into a trade war set
  tariff that maximizes your blocs 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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Box 8.5 Insurance Policies
Source Whalley (1998)See S-W box 8.5 for
further explanations