DP857 A Domino Theory of Regionalism

Author(s): Richard Baldwin
Publication Date: November 1993
Keyword(s): European Integration, NAFTA, Political Economy, Regionalism
JEL(s): F01, F13, F15
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=857

Regional liberalization sweeps the globe like wildfire while multilateral trade talks proceed at a glacial pace. Why are countries eager to liberalize regionally but reluctant to do so multilaterally? The answer of the GATT-is-dead school is that multilateralism is too cumbersome for contemporary trade issues. This paper proposes a very different answer. Recent regionalism is caused by two idiosyncratic events multiplied by a domino effect. The triggering events <196> the US-Mexico FTA and the European Community's 1992 programme <196> had nothing to do with GATT's health. The domino effect is simple. Political equilibria, which balance anti- and pro-membership forces, determine governments' stances on regional liberalization. Domestic exporters to regional blocs are a powerful pro-membership constituency. An event that triggers closer integration within an existing bloc reduces the profits of non-member exporters, inducing them to boost their pro-membership political activity. The extra activity alters the political equilibrium, leading some countries to join. This enlargement further harms non-member exporters since they now face a disadvantage in a greater number of markets. This second-round effect brings forth more pro-membership political activity and a further enlargement of the bloc. The new political equilibrium is marked by larger regional trading blocs. In the meantime regionalism appears to spread like wildfire.