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News Release

Regional Blocs Support Global Trade System

October 16, 1997

Contact:    C. Fred Bergsten    (202) 328-9000

Washington, DC—With the Clinton Administration urging Congress to approve fast-track authority to negotiate both regional and multilateral trade agreements, the relationship between regionalism and multilateralism has again become a major policy issue. Some observers worry that regional groupings such as the European Union, the North American Free Trade Agreement, Asia Pacific Economic Cooperation (APEC) forum and Free Trade Area of the Americas (FTAA) are detracting from global trade liberalization.

Regional Trading Blocs in the World Economic System is a comprehensive review and analysis of this issue. It includes historical, econometric, theoretical and political economy approaches. The analytic framework departs from much prior research by emphasizing the importance of geography, without which regionalism means little. It adjusts bilateral trade flows for such influences as distances between pairs of countries, their sizes, and whether they share common borders or common languages, in order to isolate the impact of regional arrangements on actual trade patterns. The book was written by Jeffrey Frankel, currently a Member of the Council of Economic Advisers, while he was a Senior Fellow at the Institute for International Economics (with collaboration from Ernesto Stein of the Inter-American Development Bank and Shang-Jin Wei of Harvard University).

The main conclusions of Frankel's analysis are that:

  • the world economy is better characterized as moving toward two large regional blocs in the Pacific Rim and Europe, institutionalized in APEC and the European Union, rather than three (in Asia, Europe and North America);
  • unlike most of the proclaimed regional trading arrangements of thirty years ago, the current round of free trade arrangements (FTAs) is having a significant effect on trade;
  • regionalization could in theory become excessive, with the detrimental effects of trade diversion dominating the beneficial effects of trade creation, in a situation that he calls "supernatural" (as opposed to "natural") trading areas;
  • but regional initiatives can help build political momentum for taking down trade barriers more generally. The evidence suggests that the practical outcome for a number of FTAs has been a partial reduction in barriers to outsiders at the same time that barriers are lowered among FTA members. In this respect the current regionalism movement is clearly beneficial.

The book makes a number of policy recommendations aimed at further enhancing the compatibility of regional arrangements with global liberalization, including proposals to:

  • sharply increase enforcement of the current rules of the World Trade Organization that govern regional arrangements, for example, by insisting that they not exclude politically sensitive sectors (such as agriculture), and create new rules governing such distortions as rules of origin and antidumping practices;
  • require that regional arrangements lower their barriers to nonmembers, by enough to avoid trade diversion, while they are eliminating barriers within the group;
  • take the lead in future multilateral trade liberalization, as APEC did in 1996 with the Information Technology Agreement through which most WTO members subsequently agreed to eliminate their tariffs in that dynamic sector;
  • keep membership open to newcomers; and
  • seek maximum compatibility between the rules and practices of different blocs, especially those in early formative stages such as APEC and the FTAA.

Frankel concludes by urging the United States to reject the notion that there is geopolitical competition among an "American bloc", a yen bloc and an EU bloc. He recommends that the United States, as the key member of the APEC and FTAA groupings, in fact "do anything possible to make sure that [these regional arrangements] evolve in a manner consistent with global liberalization."