The rapid global spread of regional liberalization has contrasted markedly with the glacial pace of the multilateral GATT talks, which many view as too cumbersome to deal with contemporary trade issues. In Discussion Paper No. 857, Programme Director Richard Baldwin argues that GATT Rounds were always long, slow and difficult and attributes the current wave of regionalism instead to two idiosyncratic events which have been multiplied by a `domino effect'. In his model, the stance of a non-member country's government reflects a political equilibrium between pro- and anti-membership forces. Closer integration within the bloc damages the profits of its exporting firms, which increase their pro-membership lobbying, so a previously indifferent government may opt to join. The cost of non-membership rises with the bloc's size, so there is further lobbying until a new equilibrium is attained with an enlarged bloc.

Baldwin relates his model to recent developments in Europe and the Americas. First, while the EC(12) political leaders' primary aims in creating a single market were geopolitical and philosophical, the `1992' programme also threatened non-EC exporters' relative competitiveness. Once Austria and Sweden applied to join, the domino effect induced lobbying in the remaining EFTA members, especially Finland and Norway, which depend heavily on Swedish markets. Second, Mexico and the US formed a free trade area in order to boost growth, lock in pro-market reforms and foster stability in Mexico. This initiative cannot substitute for global liberalization in US eyes, since Mexico's entire economy is smaller than that of the Los Angeles basin; its announcement nevertheless provoked concern throughout the Americas that Mexico's preferential access would harm other countries' profits and market shares and divert foreign investment. Such fears enabled Canada to join in the North American Free Trade Agreement, despite continued domestic opposition to the earlier USCanada FTA, and they induced several Latin American countries to approach the US formally or informally to open bilateral trade talks.

A Domino Theory of Regionalism
Richard Baldwin

Discussion Paper No. 857, November 1993 (IT)