Studies on the Relationship between Regional Integration and Globalization

Studies on the Relationship between Regional Integration and Globalization 

After 1980s, the Vinerian seminal work has considered as representing the static nature of
preferential trade agreements. Dynamic analysis that deals with the long run relationship of
regionalism and multilateralism has considered two  time path questions of Bhagwati
(1993). While the first time path question inserts the assumption that time path of regional
economic integration does not affect (or influence) the one of multilateral trade   18
negotiations, the second time path question considers the case where there is a
interrelationship between the trends of regional economic integration and multilateral trade
negotiations.   

The first question concerns the incentives of non members to be a member and the
willingness of the member countries to offer entry until the utmost outcome of global free
trade. Baldwin’s (1993) study is in line with this question. Baldwin employs the ‘domino
theory’ that emphasizes the existence of idiosyncratic events on creating economic
rationale for non members to participate in the RIA. These events consequently bring
about a multiplier effect that “knocked down bilateral import barriers like a row of
dominos” (Baldwin, 1997, p.877). In his framework, Baldwin gives the US Mexico FTA,
NAFTA, MERCOSUR, the completion of the EC’s Single Market and the weakening of
the USSR as the examples of shocks that triggered dominos, i.e. pushed non members to
apply for membership in RIAs. From this empirical evidence, Baldwin (1993) concludes
that the domino effect will eventually lead to global free trade. In response to the critiques
of not taking into account the resistance of members for new memberships, Baldwin (1997,
p.878) states this would not change the result and notes that “the new political economy
flames may find vent in preferential arrangements among excluded countries”.

The second time path analysis of Bhagwati (1993) focuses on the determination of whether
RIAs will be the ‘building blocs’ or the ‘stumbling blocs’ in front of the worldwide non
discriminatory free trade. In line with this distinction, present section will survey firstly
studies that emphasize regional integration as a contributing factor to the processes of
multilateral tariff liberalization and multilateral free trade. Secondly, the opposing
arguments on regional integration and multilateralism are to be studied.

Ethier (1998) employs many country, specific factors model in order to assess the
relationship between regionalism and multilateral world. The author, as a result,
emphasizes that rather than threatening multilateralism, regionalism is the direct
consequence of the success of of multilateral liberalization. In a similar vein, Freund
(2000) employs oligopolistic model of trade with three countries import and export one
imperfectly competitive good.  The study concludes that as welfare gain from membership   19
in an RIA is greater when tariffs are low, each round of multilateral tariff liberalization
should be accompanied by an increase in the number of RIAs.

Kim and Shin (2002) employ social network approach for the analysis of regionalism and
globalization. Their results indicate increase in overall network density between 1959 and
1996. According to this, they conclude that world trade has been globalized. Another result
that is increase in the intraregional density, on the other hand, supports the idea of
regionalized trade. The authors entail this two sided improvement in international trade to
the fact that globalization and regionalism are not contradictory processes.

Woolcock (2003) by comparing the provisions of the EU Poland, the EU Mexico, Euro
Med, NAFTA, Chile Canada FTA and Closer Economic Relations (CER) agreements with
the provisions of the GATT/WTO states that these agreements generally are WTO plus (or
GATS plus). As a result, Woolcock concludes that the RIAs tend to complement rather
than undermine multilateral rules. 

Ornelas (2005) asserts that when considering the effects of FTAs, both determination of
external tariff level and participation in an FTA should be treated as endogenously
determined concepts. Accordingly, taking into account endogeneity of these policies would
reduce the importance of special interests in an FTA. In this set up, when members of an
FTA lower their internal trade barriers, they tend  to reduce their external tariffs as well.
Consequently, an FTA formation would result in support for further multilateral
liberalization. 

Baldwin (2006a), on the other hand, studies the political economy framework for the trade
liberalization by categorizing it into three mechanisms, as the ‘juggernaut effect’ for
multilateral trade liberalization, the ‘domino effect’ for regional trade liberalization, and
‘race to the bottom unilateralism’ for unilateral trade liberalization. The author also states
three ancillary political economy logics that are interacting with the above mechanisms.
These are intra sectoral special interest politics, asymmetric lobbying effects and the
magnification of footloose ness. Examining the period starting with the Reciprocal Trade
Agreement of 1934, Baldwin states that multilateralism, regionalism and unilateralism are   20
not substitutes, but complements of each other. Furthermore, the author calls the proposed
political economy framework as the ‘spaghetti bowls as building blocs’ mechanism.

Pomfret’s (2007) study examines regionalism issue from the historical perspective. The
author distinguishes three waves of regionalism as the first wave covering 1950s and 60s,
the second wave covering the period of 1980s until  the establishment of WTO, and the
third wave from the early 2000s onwards. He states that “regionalism has twice [in the first
and second waves] appeared as a terminal threat to the GATT system but multilateralism
emerged stronger ever after the Kennedy and Uruguay Rounds” (ibid., p.925). For the third
wave prevailing now, he again emphasizes the strength of WTO system in the international
economics. The author points out other factors like Multifibre Arrangement quotas and the
use of agricultural safeguards as elements that are more important types of discrimination
than RIAs. Accordingly, regionalism does not threaten multilateral trading system as
significantly as it is generally announced. 

There are also some studies that interpret regional integration as an impeding factor in
front of multilateralism. For example, Levy (1994)  forms his analysis through a median
voter model in which voters in two countries are opting for membership in an FTA or
sticking to multilateral liberalization. Accordingly, in a model based on the Heckscher
Ohlin framework, an FTA option can not make feasible multilateral liberalization as
infeasible; it can not also make previously infeasible multilateral liberalization as feasible.
However, when the model is extended to consider product differentiation, expected effects
arising from the formation of an FTA change significantly. With this kind of model, a
given FTA can constitute a stumbling bloc in front  of the global free trade due to trade
gains that result from differences in factor endowments and product variety.

Grossman and Helpman (1995), on the other hand, study the formation of an FTA in the
political economy framework that emphasizes the interaction between special interest
groups and governments.  The study concludes that governments respond to pressures of
industry special interests, but they also take into consideration the average voter. The
authors state that if some industries can be excluded from the scope of an agreement, then
the likelihood of signing this agreement would improve (ibid., p.687).    21
Krueger (1997) asserts that political economy of FTAs will lead these agreements to be
stumbling blocs in front of further multilateral trade liberalization than will customs
unions. This mainly derives from the fact that FTAs include rules of origins that are
governed by special interest groups.

Bagwell and Staiger (1998, 2002) employ a general model that includes governments that
are motivated by political and terms of trade considerations in order to evaluate the effects
of reciprocal trade agreements on multilateral trading system; especially on non
discrimination, reciprocity and enforcement mechanism. Through politically augmented
terms of trade approach, they show that these agreements may retard the effectiveness of
reciprocity and non discrimination. Accordingly, as free trade areas violate most favored
nation (MFN) principle, the efficiency properties of a multilateral system that depends on
the principles of reciprocity and non discrimination will be damaged. For the customs
union case, the only multilateral friend type is possible when all external tariffs are set to
conform to the principle of non discrimination. On the enforcement issue, the consequence
of RIAs is ambiguous and depends on the time period of analysis, the extent of trade
diversion and the extent of multilateral cooperation. The authors conclude that RIAs may
constitute a potential threat for multilateral trading system.

Krishna (1998) employs a model of imperfect competition with oligopolistic firms
producing substitutable goods, in order to study the conditions for partners’ support for a
bilateral agreement and the impact of FTA formation on the incentives of continuing on
multilateral trade liberalization. He asserts that the more trade diverting FTA between two
countries, the more likely it will be supported and more it counteracts against the
multilateral trade liberalization. Hence, with certain amount of trade diversion, the initially
feasible multilateral liberalization can become infeasible as a result of the special interests
based FTA. 

Bond, Riezman and Syropoulos (2004) work with a three country general equilibrium
model to determine the likely effects of an FTA formation on the tariff and welfare levels
of all countries. Accordingly, the formation of FTA may undermine multilateral trade
liberalization if member countries employ optimal external tariffs. However, it is stated   22
that as member countries tend to lower their external tariffs after the establishment of FTA,
this will improve terms of trade and welfare of the excluded country. If the member
countries are sufficiently large, then trade creation induced welfare improvement will
dominate and FTA will be beneficial for the members, too. As a result, the welfare gains
on both sides may undermine the attainment of global free trade. 

Limão (2006a), on the other hand, uses data on the US tariffs with the distinction of PTA
goods that are covered by PTA and non PTA goods that are excluded within the
integration. The study states that MFN tariffs for  PTA goods of the US are higher on
ninety percent of all goods than they would be in the case of not forming PTA. The study
concludes that PTAs of the US constitute a stumbling bloc to multilateral trade
liberalization of the US. Estimating the difference in MFN tariff reduction between PTA
and non PTA goods for the EU and the US cases, Limão (2006b) finds that PTAs of these
important traders result in delay on multilateral tariff liberalization and increased
discrimination via non tariff barriers.