New regionalism tendencies and the impact on world trade

Seminar Paper, 2011

14 Pages, Grade: 1,3



1 Introduction

2 Multilateralism vs. Regionalism
2.1 Regional Trade Agreements - Types and Development
2.2 GATT Regulations

3 New Regionalism - Impact on World Trade
3.1 Positive vs. Negative Effects
3.2 Winners and Losers
3.3 NAFTA effects on the Mexican and the World economy

4 Conclusion

5 Bibliography

List of Figures

Figure 1: EU - Trade to GDP ratio

Figure 2: Types of Regional Trade Agreements

Figure 3: Number of RTA’s by year of notification

Figure 4: Foreign Direct Investments - Inflow to Mexico in $US Billion

Figure 5 : Number of Maquiladoras by the country of origin as of 2002

Figure 6: Asian Spaghetti Bowl

List of Tables

Table 1: NAFTA Impact on the Mexican economy - yearly averages to the year 2005

List of Abbreviations

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1 Introduction

In 2009 German exports totaled 816 billion Euros in value. (EU Observer, 2010).

During the 20th century cross-border trade has become one of the defining parameters for many economies and their enterprises in order to achieve competitive advantages. In most countries international trade represents a significant share of the gross domestic product (see figure 1, p.5). Free trade policies have set the base for these global economic integration tendencies.

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Figure 1: EU - Trade to GDP ratio (WTO, 2010)

This essay examines the desirability of regional economic integration in comparison to the multilateral trade approach promoted by the World Trade Organization (WTO). In specific it discusses the question whether regionalism encourages or discourages trends towards free trade on a global basis.

2 Multilateralism vs. Regionalism

Passionate debates of economists about global economic integration provide two major directions: regionalism and multilateralism. The reality is more complex than economic theory; hence, it is stated that the two models are not mutually exclusive, but complementary. Liberalization tendencies in general are driven by the principle that free trade positively stimulates the economic welfare as profits are expected to be higher than participation costs in the respective alliance (Salvatore, 2001, p. 339). The multilateral trade policy approach is characterized by a cooperative action of multiple states considering the interests of all union partners. International organizations, such as the UN or the WTO, follow this approach. Rules and principles are the common denominator among all members which the WTO constantly aims to extend. However, different backgrounds and goals throughout all members limit the scope for agreements (Hauser / Zimmermann, 2001). In contrast to the multilateral approach economic regionalism refers to the tendency of a limited number of states (in close geographical proximity) to establish a partnership with the objective of dismantling trade barriers systematically. Today, ,,regionalism tendencies” exist as well between countries which are not located in the same area.

2.1 Regional Trade Agreements - Types and Development

Based on the type of integration RTA’s can be classified into different groups (see figure 2, p.6). The range covers low level integration agreements as well as monetary or economic unions, which are characterized by a high level of interaction between its individual members (Piggott / Cook, 2006, p.89). Details about every type of agreement are outlined by Grimwade (2000, p.341) and Salvatore (2001, p.340) and will not be discussed in detail in this essay.

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Figure 2: Types of Regional Trade Agreements

The development of RTA’s can be classified into two waves. The first one was taking place during the 1950s and 1960s, strongly driven by the establishment of RTA’s in the European area such as the European Community in 1957. Many agreements established during the first wave of regionalism broke down by the end of the 1960s as expectations were not met (Grimwade, 1996, p. 21). Over the last 20 years the number and relevance of RTA’s greatly increased around the world (see figure 3, p.7). This ,,second wave of regionalism” was characterized by the integration of the most relevant world economies (Beise, 2001). Economic reasons and the stagnation of WTO negotiations have been the main drivers behind this development as underlined by Crawford and Fiorentino: ,,Sluggish progress in multilateral trade negotiations under the Doha Development Round appears to have accelerated further the rush to forge RTA’s.” (cf. Crawford / Fiorentino, 2005).

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Figure 3: Number of RTA’s by year of notification (cf. Hauser / Zimmermann, 2001)

2.2 GATT Regulations

Classic economic theories of Smith and Ricardo propose that worldwide free trade would be the preferred solution to increase total welfare (Grimwade 2000, Ch.2). Based on these fundamental findings multilateral trade negotiations via the WTO would be the most convenient approach when it comes to international trade policies. In contrast, the new regionalism currently indicates a trend towards regional trade negotiations. Base on the most favoured nation principle GATT’s Article XXIV actually declines RTA’s, however tolerates them under certain circumstances as outlined by Bhagwati, (2002, p.106) and Grimwade (2000, p.345).

3 New Regionalism - Impact on World Trade

The question whether trade liberalization via RTA’s should be considered as a "building block" or "stumbling Block" in regards to the multilateral trade approach is debated intensively in worldwide economic science (Bhagwati, 2002, p.106 - Hauser / Zimmermann, 2001). Regionalism on the one hand indicates the liberalization of national markets on a regional level. In contrast, the foreclosure of RTA’s against external influences cannot be totally avoided, leading to the fact that trade protectionism might be transferred from national borders to the RTA boarders. Theoretical aspects are illustrated below and clarified via an example - NAFTA effects on the Mexican and the World economy.

3.1 Positive vs. Negative Effects

As first published by Jacob Viner in the 1950s, regional integration can lead to welfare- enhancing trade creation due to reduced tariffs agreed on between member states. The increase in welfare results out of the reallocation of sources in the process of utilizing comparative advantages. In addition, dynamic effects caused by regional integration are based on the coherence of market size and productivity. Increased market size might lead to a higher production level and a decrease in costs per unit due to the realization of economies of scale. These two effects generally occur during market liberalization, regardless whether this process is focused on a limited number of RTA members or on the multilateral scope. Regional integration supporters however assume that this process can proceed more effectively within RTA’s due to its homogeneity and limited number of members (Hauser / Zimmermann, 2001).

In contrast to the positive effects listed above regionalism leads to trade diversion, which has to be classified negatively. This phenomenon occurs if market liberalization does not cover all, but only selected countries as preferred by RTA’s. The substitution of lower- priced imports from third party countries with less competitive imports from union member countries leads to welfare reducing trade distortions (Bhagwati, 2002, p.106). This process supports the import of products with a higher level of manufacturing costs, reducing overall production efficiency. Additionally, economic regionalism, in conjunction with the abolishment of trade barriers, effects the allocation of direct investment across borders as private industry is seeking for the most profitable locations. This can be illustrated by increased flow of capital to eastern European countries after they joined the EU.

In general RTA’s can increase welfare among its participants. The level of increase however strongly depends on the level of liberalization against non-members as otherwise the welfare decreasing effect (trade diversion) compensates the positive impact (trade creation). Consequently, WTO rules state that the level of tariffs applied prior to the commitment has to set the maximum for the new generation of external restrictions applied in the partnership. However, research has underlined that an increase in external tariffs is not unusual by agreeing on a RTA. ,,The Peso crisis in Mexico led to raising tariffs on non NAFTA economies of about 15%” (cf. Panagariya, 1998, p. 34).


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New regionalism tendencies and the impact on world trade
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Multilaterialismus, Regionalismus, World Trade, NAFTA, GATT, Free Trade Agreement, WTO, Regional Trade, Multilateral Trade, Trade Creation, Trade Diversion
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Patrick Daum (Author), 2011, New regionalism tendencies and the impact on world trade, Munich, GRIN Verlag,


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