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Three decades ago
regionalism and free trade arrangements swept developing countries, but
expectations of economic development through regional integration were
not realized and these arrangements were judged a failure. As the GATT
process falters many countries are turning again towards bilateralism,
but the success of trade liberalization under the GATT and by many
developing countries acting unilaterally has weakened the case for
regionalism. In Discussion Paper No. 715, Research Fellows Jaime de
Melo and Dani Rodrik, with Arvind Panagariya, assess
whether regionalism can accomplish more than unilateral trade
liberalization (UTL) and whether such integration may be a step towards
freer world trade. They find that a Free Trade Area (FTA) will be more
trade-creating, the higher the initial tariff, the lower the post-union
tariff on third countries and the greater the complementarities in
partners' import demands. Quantitative restrictions always allow the
design of an FTA that is welfare- improving for members with no net
effect on non-members, but the intra-bloc compensation schemes this
requires have often been distortionary in past FTAs. With high
protection between blocs, a small country may prefer to join a bloc, but
scale economies do not provide a rationale for regionalism in
themselves. |
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