Studies on the Effects of Regional Integration on Members/Non4members

Studies on the Effects of Regional Integration on Members/Non4members

This section will survey the studies that consider  the effects of the formation of RIAs on
member and non member countries. For example, Brada and Méndez (1985) take into
account three developed (the EEC, EFTA and CMEA) and three developing country
(CACM, LAFTA and the Andean Pact) integration schemes. They conclude that an
effective integration is possible for both groups. They also note that while inter member
distances limit the benefits of integration in Latin America, the system and policy
differences of CMEA relative to the market economies do not change the expected results.
On another study, Brada and Méndez (1988) study dynamic effects of regional integration
on investment levels and factor productivity growth for six integration schemes (EEC,
EFTA, LAFTA, CACM, EACM and CMEA). For the period 1951 77, the study concludes
that the impact of dynamic effects of integration is no more than 1 per cent of members’
GNP. Hence, the dynamic effects are neither a reason of raised growth rates nor a raison
d'être for integration for the given sample.
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Shiells (1995) starting with the examination of economic and non economic motives for
the formation of RTAs emphasizes the necessity of considering the welfare gains of RTAs
beside their trade creation and trade diversion effects. Nationalization of existing industry
structures, FDI flows and dynamic gains from learning by doing, improved product
quality, greater product variety are proposed as further welfare gains entailed to such
agreements. 

Wonnacott (1996) states that trade diversion would  increase competition and
specialization, beside its supply switching effects. Overall, this process can make member
of an FTA the lowest cost source. The study also incorporates the hub and spoke analysis
1

to the issue of overlapping FTAs and concludes that diversion will increase as a result of
this overlap and hub (center of integration) rather than spokes is the probable gainer in
such a system.

Wei and Frankel (1998), on the other hand, state that in a world of increasing trade blocs,
an open regionalism (defined as the reduction in barriers on imports from third countries)
with a modest external liberalization can be welfare improving, but not as much as the one
that will attained as a result of multilateral tariff liberalization. Moreover, as it is stated in
Frankel, Stein and Wei (1996), the international trade rules should be modified to ensure
welfare improving RIAs. Rather than complete elimination of internal barriers (required by
Article XXIV), the partial internal liberalization serves better results in this respect.

Cadot, De Melo, and Olarreaga (1999) use three good, three country model to examine the
effects of regional integration on the external trade policies of member countries. The
study concludes that protectionist pressures against non member countries will increase as
a result of the deepening integration and states that trade diverting RIAs are the ones that
are politically most viable.

Antkiewicz and Whalley (2006) takes into account regional trade agreements covering
Brazil, Russia, China, South Africa and ASEAN as large population and rapidly growing
                                                
1
 The hub and spoke analysis of RIAs is as follows if one member of the agreement has also other RIAs with
a number of countries that keep trade barriers against each other, then this member becomes the hub, i.e. the
preferred location, for investment flows (Schiff & Winters, 2003, p.78).   24
non OECD economies. Accordingly, recent agreements  covering these countries include
WTO plus subjects like intellectual property, competition policy and mutual recognition,
beside their own dispute settlement procedures. For this group of countries, the study
emphasizes that although the agreements are in line with WTO disciplines, they represent
some kind of a response to multilateral failures like “Multilateral Agreement on Investment
(MAI) and the repeated Doha Round setbacks” (ibid., p.346)
1
.

Baharumshah, Onwuka and Habibullah (2007) investigates the (ASEAN 5)+3 economies 
(Malaysia, Indonesia, Philippines, Singapore and Thailand, plus Japan, China and South
Korea) in order to find out that whether regional integration is an obstacle in front of the
multilateral trade liberalization or not. For the period 1967 2000, the study tests the
existence of any long run relationship between regional and multilateral terms of trade and
concludes regional trade integration does not hinder the global integration in the region.
Accordingly, two forms of liberalization (preferential and multilateral) are complementary
to each other for the given sample of countries. 

Ornelas (2008) states that, in addition to endogenous external tariff formation (stated in
Ornelas (2005)), if RIAs provide non trade gains, like investment liberalization,
infrastructure cooperation and harmonization of competition policies, to their members,
distributive asymmetry arising from the formation of RIAs in favor of member countries
could be altered, and both members and non members could gain from regionalism.

As a final note, it would be beneficial to cite the study of Abrego et al. (2006) which
relates the outcome of a given study to the model specification employed. Through
computational techniques, the authors test the validity of various propositions in the
literature on regional integration agreements.  The study compares free trade and three
country non cooperative (Nash) equilibria with partial cooperation regional agreement
equilibria where two countries form a customs union and play noncooperatively against the
non member country. Eight propositions that are taken into consideration are as follows: 1.
Both members benefit from a customs union relative to free trade. 2. Both members benefit
from a customs union relative to Nash equilibrium.  3. A customs union increases world
                                                
1
 Authors call MAI and Doha Round as ‘multilateral failures’, for these two initiatives couldn’t become
effective.   25
welfare relative to 3 country Nash equilibrium. 4. Customs unions are a “stepping stone”
to free trade (i.e. members are better off in CU relative to Nash, and members gain from
free trade). 5. A customs union results in higher external tariffs for member countries
relative to Nash equilibrium. 6. A customs union improves member countries’ terms of
trade relative to Nash equilibrium. 7. A customs union increases member countries’
volume of trade relative to free trade. 8. A customs union increases member countries’
volume of trade relative to Nash equilibrium. As a  conclusion, the authors state that the
given propositions related to regional integration are not largely true and the outcomes will
mainly depend on the model characteristics employed in a given study.