Do You Think the Increased Use of Rtas Is a Building or Stumbling Block for International Trade?

Do you think the increased use of RTAs is a building or stumbling block for international trade?

Introduction

This essay will be dealing with the controversial topic of regional trade agreements (RTAs) with a view to evaluate the effects of RTAs on international trade. Over the last decades, the proliferation of RTAs has been taking place at a very high pace with the result that in 2016 over 400 regional trade agreements are in force (WTO, Facts and Figures, 2016).

As a first step, I would like to define a regional trade agreement as such. Mansfield and Milner are pointing out in their analysis, that it is hard to find a commonly accepted definition which is mainly due to the word “regional”. However, in this essay we will use the definition given by the WTO: “Regional trade agreements (RTAs) are defined as reciprocal trade agreements between two or more partners. They include free trade agreements and customs unions” (WTO, 2016). Moreover, I would like to distinct old regionalism and new regionalism as well. New regionalism describes the new wave of RTAs since the early 1990s while old regionalism refers to the time of RTAs before 1990.

The essay will be divided into two major parts. In the first part we will be looking at the arguments regarding RTAs as stumbling block for multilateral trade while in the second part we will reflect upon arguments considering regional trade agreements as a building block. Within this debate we will have a look at different authors providing us with different angles of view on RTAs and their impact. As a final step, I will try to answer the question, forming the goal of the essay.    

Regional trade agreements as a stumbling block

The first argument against RTAs is that the exponential rise of it has led to, how Bhagwati (1995) has called it, the “spaghetti bowl effect”. Panagariya (2000) claims that such a high number of “free-trade intentions threaten to reproduce the chaos in the tariff regime that was created in the 1930s by protectionism and the absence of the MFN principle in trade policy” (Panagariya, 2000, p.328). Moreover, Kimura, Kuno and Hayakawa (w.d.) have set up an empirical analysis on the spaghetti bowl effect, indicating the existence of this phenomenon. Yet, according to Panagariya “once external tariffs drop to zero, tariff preferences and the spaghetti bowl created by them will automatically disappear” (Panagariya, 2000, p.328).

Another point we are going to tackle is trade diversion which is often propounded as a negative consequence of RTAs. Even though trade diversion is negative, numerous authors claim that in fact, trade creating effects are exceeding the trade diverting effects. According to Krugman (1991) this is mainly due to the fact that the proximity between the countries forming an RTA reduces the effect of trade diversion. Summers (1991) goes even further and claims that even trade diverting regional arrangements will increase welfare. In addition to Summers point of view, Ethier (1998) states that nowadays trade diversion is less important than thirty years ago, during the time of old regionalism. Reflecting upon all these arguments, trade diversion seems to become overblown. However, Baccini and Dür (2012) see trade diversion as the source of new regionalism. They assert in their empirical paper that “the formation of preferential trade agreements is indeed an interdependent process and seems to be largely driven by countries responding to the negative externalities of existing agreement” (Baccini and Dür, 2012, p.77). Their assertion is braced by very supportive empirical results. Baccinis and Dürs results would coincide with Baldwin’s “Domino effect”. According to Baldwin (1993) as a regional bloc enlarges and the cost disadvantage for nonmembers, resulting from trade diversion, increases, more and more nonmembers are going to request membership in order to avoid this disadvantage. This would mean that the explosion of RTAs over the last years has been triggered by the negative effect of trade diversion. Nonetheless, Baldwin takes a step back by stating that new regionalism cannot be explained by the domino effect alone, since some agreements weren´t concluded because of economic reasons.