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Regional Trading Blocs Notes

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Pip Reeve IEMT10W5T4 Does the growth in the number of regional trading blocs make it more or less likely that global free trade will be achieved?
This is a very important question in terms of policy, 'the stakes in the bet as to whether RIAs are stepping stones to multilateral trade liberalisation or millstones around its neck are huge.' 1I will begin with a number of definitions. I will discuss two main types of trading blocs, or Regional Integration Agreements (RIAs); customs unions (CU) and Free Trade Agreements (FTA). CU's impose the same 'Common External Tariff' (CET) on all goods. FTA's agree to trade with each other freely, without tariffs. While some 'argue that preferential agreements can complement existing multilateral efforts to foster greater economic integration among countries,' 2 others 'see such agreements as a threat to the multilateral system.'3 I will begin with a brief discussion of the GATT guidelines on regional trading blocs. It is important to remember that these are guidelines which are voluntarily and consensually followed. GATT has three main guidelines related to regional trading blocs. Firstly, trading blocs 'must not, 'on the whole,' raise protection against excluded countries.' 4 Secondly, they 'must reduce internal tariffs to zero and remove 'other restrictive regulations of commerce' other than those permitted by other GATT articles.' 5 Finally, they 'must cover 'substantially all trade.'' 6 There is also an 'Enabling Clause' which offers weaker guidelines for regional trading blocs that are made up purely of developing country members. However, these guidelines will not necessarily guarantee global free trade, even if they are followed. Winters claims that 'RIAs that are wholly GATT-compatible can nevertheless be predominantly trade diverting; excluded countries can suffer terms of trade declines; protection can increase; and institutions can arise that make liberal policies less likely.' 7 Using the graph below (Figure 1 and discussion taken from Bhagwati, Greenaway & Panagariya 1998), I will analyse the different paths that Preferential Trade Agreements (PTAs) can take. For the PTA time paths; an upward movement along the path implies growing membership. For the Multilateral Trade Negotiations (MTN) time paths; an upward movement implies non-discriminatory lowering of trade barriers among the nearly worldwide WTO membership instead. The PTA and MTN time paths are assumed to be independent of each other. In this model, U* is the goal of achieving global free trade on a non-discriminatory basis, at a specified time. PTA's can take a number of different paths which I will analyse throughout the course of this essay.

Firstly, PTA's may improve welfare immediately (e.g. Path I), or reduce it (e.g. Path III or IV). Either way, the PTA could then be stagnant (Path II or III) or lead to multilateral free trade for all at U* (Path IV or Path I). Using multilateral trade negotiations, the time path may fail to reach U* and instead fall short at Um because of free rider problems. 1 Winters Ch. 8 2 'Will preferential agreements undermine the multilateral trading system?' Bagwell & Staiger 1998 3 'Will preferential agreements undermine the multilateral trading system?' Bagwell & Staiger 1998 4 Winters Ch. 8 5 Winters Ch. 8 6 Winters Ch. 8 7 Winters Ch. 8

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