1687. Regionalism versus Multilateralism

L. Alan Winters
(November 1996)

Do the forces that regional integration arrangements set up encourage or discourage a trend toward globally freer trade? We don't know yet.

The literature on regionalism versus multilateralism is growing as economists and political scientists grapple with the question of whether regional integration arrangements are good or bad for the multilateral system. Are regional integration arrangements "building blocks or stumbling blocks," in Jagdish Bhagwati's phrase, or stepping stones toward multilateralism? As economists worry about the ability of the World Trade Organization to maintain the GATT's unsteady yet distinct momentum toward liberalism, and as they contemplate the emergence of world-scale regional integration arrangements (the EU, NAFTA, FTAA, APEC, and, possibly, TAFTA), the question has never been more pressing.

Winters switches the focus from the immediate consequences of regionalism for the economic welfare of the integrating partners to the question of whether it sets up forces that encourage or discourage evolution toward globally freer trade. The answer is, "We don't know yet." One can build models that suggest either conclusion, but these models are still so abstract that they should be viewed as parables rather than sources of testable predictions.

Winters offers conclusions about research strategy as well as about the world we live in. Among the conclusions he reaches:

• Since we value multilateralism, we had better work out what it means and, if it means different things to different people, make sure to identify the sense in which we are using the term.

• Sector-specific lobbies are a danger if regionalism is permitted because they tend to stop blocs from moving all the way to global free trade. In the presence of lobbies, trade diversion is good politics even if it is bad economics.

• Regionalism's direct effect on multilateralism is important, but possibly more so is the indirect effect it has by changing the ways in which groups of countries interact and respond to shocks in the world economy.

• Regionalism, by allowing stronger internalization of the gains from trade liberalization, seems likely to facilitate freer trade when it is initially highly restricted.

• The possibility of regionalism probably increases the risks of catastrophe in the trading system. The insurance incentives for joining regional arrangements and the existence of "shiftable externalities" both lead to such a conclusion. So too does the view that regionalism is a means to bring trade partners to the multilateral negotiating table because it is essentially coercive. Using regionalism for this purpose may have been an effective strategy, but it is also risky.

This paper — a product of the International Trade Division, International Economics Department — was prepared for a conference on regional integration sponsored by the Centre for Economic Policy Research, La Coru-a, Spain, April 26-27, 1996, and will appear in the conference proceedings. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Audrey Kitson-Walters, room N5-039, telephone 202-473-3712, fax 202-522-1159, Internet address akitsonwalters@worldbank.org. (71 pages)

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