Regional integration agreements (RIAs) and the slow progress of the Uruguay Round have raised concerns that regionalism will reduce global welfare. Such concerns largely derive from misguided inferences from the rise in the shares of industrial countries' trade that takes place within regions. In Discussion Paper No. 795, Research Fellow Kym Anderson and Hege Norheim derive an index of countries' propensity to trade intra- or extra-regionally: this is the product of the trade intensity index and the trade/GDP ratio or `openness' index. They use this new index to show that Europe's propensity to trade externally trebled in the hundred years to 1928, while all regions' propensity to trade extra-regionally fell in the 1930s and has increased for virtually all regions since. This extra-regional trade propensity has increased by more than 50% since 1963 on average and has risen even for Western Europe.

Anderson and Norheim then consider the effects of dismantling imperial trade preferences and show that much of the growth in French and British trade with other European countries took place at the expense of trade with their former dependencies, while reforms in Central and Eastern Europe are now leading to further regionalization within Europe. This is welfare improving to the extent that global gains from dismantling imperial preferences outweigh losses from trade-diversionary regional preferences.

Anderson and Norheim stress the need to ensure that the proliferation of RIAs is accompanied by continued liberalization at the global level. They propose using their index of the propensity to trade extra-regionally to determine whether RIAs' external trade policies are harming outsiders. This would provide a conservative test since it is based on shares of growing volumes of trade and output rather than volumes of trade as such. Indeed, even passing this test need not indicate a liberalizing trend, since some trade growth may simply reflect falling transport costs or increased opportunities for intra-industry specialization.

History, Geography and Regional Economic Integration
Kym Anderson and Hege Norheim

Discussion Paper No. 795, June 1993 (IT)