TABLE OF CONTENTS
Acknowledgments
Introduction - Jeffrey A. Frankel
DOI: 10.7208/chicago/9780226260228.003.0001
[free trade areas, regional trade agreements, economic welfare, tariffs, currency, gravity model, bilateral trade, General Agreement on Tariffs and Trade, North American Free Trade Agreement]
This book addresses several large questions. Why do countries adopt free trade areas (FTAs) and other regional trading arrangements? To what extent have existing regional arrangements actually affected patterns of trade? What are the welfare effects of such arrangements? In most economic models, whether classical or new-fangled, economic welfare is maximized by worldwide free trade. The difficult questions arise when one assumes that this first-best solution is not attainable politically. Which is second-best: a system of most favored nation (MFN), that is, nondiscriminatory tariffs, or a system where groups of countries deviate from the MFN principle in order to form FTAs, which eliminate trade barriers internally while keeping them externally? The issue of regional currency arrangements enters tangentially into two of the chapters, by way of their effects on trade. Several of the chapters, particularly where the effects of regional trade agreements are explored econometrically, make extensive use of the gravity model of bilateral trade. The book also looks at the General Agreement on Tariffs and Trade and the North American Free Trade Agreement. (pages 1 - 6)
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Determinants of Bilateral Trade - Alan V. Deardorff
DOI: 10.7208/chicago/9780226260228.003.0002
[bilateral trade, gravity equation, Heckscher-Ohlin model, frictionless trade, trade impediments, incomes]
It has long been recognized that bilateral trade patterns are well described empirically by the so-called gravity equation, which relates trade between two countries positively to both of their incomes and negatively to the distance between them, usually with a functional form that is reminiscent of the law of gravity in physics. It also used to be frequently stated that the gravity equation was without theoretical foundation. In particular, it was claimed that the Heckscher-Ohlin model (HO model) of international trade was incapable of providing such a foundation, and perhaps even that the HO model was theoretically inconsistent with the gravity equation. This chapter argues that the HO model, at least in some of the equilibria that it permits, admits easily of interpretations that accord readily with the gravity equation. At the same time, developing these interpretations can yield additional insights about why bilateral trade patterns in some cases depart from the gravity equation as well. After describing the theoretical foundations for the gravity equation, the chapter examines frictionless trade and trade impediments. (pages 7 - 32)
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The Role of History in Bilateral Trade Flows - Barry Eichengreen, Douglas A. Irwin
DOI: 10.7208/chicago/9780226260228.003.0003
[history, bilateral trade, gravity model, trade flows, General Agreement on Tariffs and Trade, European Economic Community, lagged trade, commercial policy, trade liberalization, international trade]
The rise of regionalism continues to pose challenges for specialists in international trade. One classic question is that concerning the aggregate welfare effects of regional trade liberalization. Another is the political economy of regionalism: how liberalization on a regional basis affects the welfare of nations and domestic interest groups, and how their self-interested actions shape the global trading system. A third question is how important regional arrangements have actually been for the pattern of trade. The gravity model of international trade has been the workhorse for empirical studies of this question to the virtual exclusion of other approaches. The idea that past trade patterns influence current trade flows is intuitively plausible. The relative importance of lagged trade and current commercial policy in explaining the pattern of trade is an empirical question. This chapter analyzes the impact of history on trade and examines the impact of the two principal trade liberalization initiatives of the early postwar period: the General Agreement on Tariffs and Trade and the European Economic Community. (pages 33 - 57)
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Why Do Countries Seek Regional Trade Agreements? - John Whalley
DOI: 10.7208/chicago/9780226260228.003.0004
[regional trade agreements, strategic alliances, security, Canada–U.S. Free Trade Agreement, North American Free Trade Agreement, domestic policy, General Agreement on Tariffs and Trade, World Trade Organization]
This chapter argues that a wide range of considerations arise when countries seek to negotiate regional trade agreements. Some see trade agreements as providing underpinnings to strategic alliances, and hence implicitly form part of security arrangements (as in Europe). Smaller countries see trade agreements with larger partners as a way of obtaining more security for their access to larger country markets (as in the Canada–U.S. Free Trade Agreement). Some countries have tried to use regional (and multilateral) agreements to help lock in domestic policy reform and make it more difficult to subsequently reverse (Mexico in the North American Free Trade Agreement). Regional trade arrangements around the world are thus different one from another, not the least because countries have different objectives when they negotiate them. This chapter also looks at the regional trade agreements notified to the General Agreement on Tariffs and Trade and the World Trade Organization (WTO) and in operation as of January 1, 1995, and included in a recent WTO volume on regionalism. (pages 63 - 87)
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Continental Trading Blocs: Are They Natural or Supernatural? - Jeffrey A. Frankel, Ernesto Stein, Shang-jin Wei
DOI: 10.7208/chicago/9780226260228.003.0005
[continental trade blocs, free trade areas, economic welfare, bilateral trade, transport costs, trade regionalization]
The world trading system seems to be moving, not just to a system of regional free trade areas (FTAs) but to a system of large continental groupings. In Europe, the European Union (formerly the European Community) removed internal barriers in 1992 and admitted three new members in 1994, bringing the total to fifteen. In December 1994, the leaders of Western Hemisphere countries met in Miami and agreed to form an FTA for the Americas. This paper investigates three questions. According to bilateral trade data, is the world indeed breaking up into a small number of continental trade blocs? In theory, is a small number of continental blocs good or bad for world economic welfare? For actual parameter values, is the current pattern of trade regionalization welfare-promoting or welfare-reducing? The welfare implication of continental blocs depends on the values of some crucial parameters. This chapter focuses on the real-world counterparts of these key parameters, particularly the magnitude of transport costs. (pages 91 - 120)
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The Welfare Implications of Trading Blocs among Countries with Different Endowments - Antonio Spilimbergo, Emesto Stein
DOI: 10.7208/chicago/9780226260228.003.0006
[economic welfare, trading blocs, trade regionalization, comparative advantage, product differentiation, free trade areas, preferential trade agreements, tariffs, closed economy, transport costs]
Over the last decade, a large number of bilateral trading arrangements have been created, strengthened, or proposed in nearly every region of the world. Empirical evidence on bilateral trade flows shows that this phenomenon has been accompanied by increased trade regionalization, at least in some regions. Therefore, the study of the economic welfare implications of trading blocs has become very relevant. This chapter examines the likely welfare effects of trade regionalization by using a two-factor model where trade is explained both by product differentiation and comparative advantage. It looks at the case of preferential trade agreements as well as that of free trade areas, the effects of transport costs, and the effects of different countries having different levels of tariffs. After setting up the model for the closed economy, the chapter allows for trade and then considers the welfare implications of different types of trade arrangements. (pages 121 - 149)
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Regional Patterns in the Law of One Price - Charles Engel, John H. Rogers
DOI: 10.7208/chicago/9780226260228.003.0007
[one price, currencies, geography, price variability, consumer prices, market segmentation, price discrimination, nominal prices, exchange rates, trade barriers]
The failure of the law of one price has been a puzzle for economists at least since Peter Isard's classic 1977 study. A related question in international trade has concerned the degree to which markets have become regionalized. This chapter explores whether price variability is smaller within regions than between regions, focusing on the roles of geography versus currencies. By looking at data on consumer prices, it argues that locations within a region share a unified distribution system for final goods. It first reviews some of the standard explanations for the failure of the law of one price, and then discusses how market segmentation and price discrimination can lead to failures, along with the role of sticky nominal prices. It also presents data on goods prices and examines the regressions relating price dispersion to distance and other geographic factors, variations in exchange rates, measures of trade barriers, and regional variables. (pages 153 - 183)
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Regionalization of World Trade and Currencies - Jeffrey A. Frankel, Shang-Jin Wei
DOI: 10.7208/chicago/9780226260228.003.0008
[trade regionalization, political economy, trade liberalization, bilateral trade, economic welfare, tariffs, free trade areas, trade blocs, gravity model, currencies]
Drawing on earlier econometric results, this chapter explores the effects that regional economic arrangements concerning currencies have had on bilateral trade. It considers economic welfare effects of regional arrangements but relaxes the assumption that tariffs maintained by members of free trade areas against outsiders are exogenously set. The chapter also reviews various political economy arguments that others have made regarding how regional initiatives might either undermine movement toward more general trade liberalization, or help build political support for it. It presents a simple model that illustrates one possible beneficial effect of trade blocs as a political building block to further liberalization. It returns to the gravity model estimates to make a tentative assessment on which of the contrasting political-economy effects of trade regionalization, favorable or unfavorable, are likely to dominate. It shows that those groupings, such as the European Community and East Asia, that have increased trade disproportionately with each other, have at the same time increased trade with non-members. (pages 189 - 219)
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Tariff Phase-Outs: Theory and Evidence from GATT and NAFTA - Carsten Kowalczyk, Donald Davis
DOI: 10.7208/chicago/9780226260228.003.0009
[tariffs, General Agreement on Tariffs and Trade, tariff phase-outs, North American Free Trade Agreement, trade negotiation, Article XXIV, economic welfare, customs unions]
Article XXIV of the General Agreement on Tariffs and Trade constitution deems admissible customs unions and free trade areas that eliminate duties on “substantially all the trade” between the partners and that apply extra-club duties that are “not on the whole...higher or more restrictive” than the initial duties. The latter of these conditions aims at preventing clubs from forming for the purpose of extracting better terms of trade from outsiders through the use of higher external tariffs by club members. This chapter first reviews the theoretical literature with particular emphasis on results on world economic welfare. It then discusses global and preferential tariff phase-outs from both a theoretical and an empirical perspective. In particular, it examines the agreed U.S. and Mexican North American Free Trade Agreement phase-outs and discusses how they might be explained from the perspective of bargaining between two governments responding to different domestic pressures and environments. It also presents a historical discussion of phase-outs both in the context of global trade negotiation rounds and with respect to Article XXIV. (pages 227 - 253)
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Overview - Anne O. Krueger
DOI: 10.7208/chicago/9780226260228.003.0010
[most favored nation, General Agreement on Tariffs and Trade, tariffs, preferential trading arrangements, European Union, North American Free Trade Agreement, bilateral trade]
Until the postwar era, most favored nation (MFN) status was far from universal. With the passage of the Reciprocal Trade Agreements Act in 1934, the United States shifted to an MFN policy for countries with whom a treaty was negotiated and, in the postwar years, strongly supported MFN through the General Agreement on Tariffs and Trade, explicitly rejecting preferential arrangements. One can at least in principle often achieve geographic discrimination through a sufficiently pointed structure of tariffs. A central question is whether formation of preferential trading arrangements (PTAs) is conducive to leading the world closer to multilateral free trade or, instead, is likely to lead to larger trade barriers between PTA groupings. Even if we did have an accepted theory of the political economy of tariff determination, we would still need a theory and methodology for estimating what bilateral trade flows would be under each of the hypothesized circumstances. In discussions of the European Union, North American Free Trade Agreement, and other regional arrangements, one question has been whether there is anything special about regional PTAs. (pages 259 - 274)
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Contributors
Author Index
Subject Index
