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At a lunchtime meeting on 16 December, Barry Eichengreen reported the results of recent research into the effects of regional agreements on inter-war trade and discussed their implications for world trade after the Uruguay Round. Eichengreen is Professor of Economics at the University of California, Berkeley, and a Research Fellow in CEPR's International Macroeconomics and International Trade programmes. His remarks were based in part on his CEPR Discussion Paper No. 837, `Trade Blocs, Currency Blocs and the Disintegration of World Trade in the 1930s', joint with Douglas Irwin, produced under CEPR's research programme on `Market Integration, Regionalism and the Global Economy', supported by a grant from the Ford Foundation. The views expressed by Professor Eichengreen were his own, however, not those of the project's funders nor of CEPR, which takes no institutional policy positions.Eichengreen stated that recent multilateral negotiations differed from others since the 1940s, since they were accompanied by a set of regional agreements: NAFTA, APEC and the EC single market. The closest parallel was the establishment of the EEC, when European dependence on the US for security and Marshall Plan assistance enabled it to insist on multilateralism in the Kennedy and Dillon Rounds as a condition of the Community's establishment. In the 1930s, when trade blocs were largely coincident with currency blocs, as now in the tri-polar 1990s, no country was strong enough to play this role. There was no ongoing multilateral process like the GATT after the Great Depression, and the volume of international trade had barely recovered to 90% of its 1929 level as late as 1938, when world production of commodities and manufactures had more than fully recovered. The share of British exports destined for the Commonwealth rose from 44% to 50%, while Germany's exports to its sphere of influence in Central and Eastern Europe and Latin America rose from 13% to 25%. Eichengreen investigated the impact of regional arrangements by estimating a `gravity model' for 34 countries for 1928, 1935 and 1938. The simple model relates the values of trade flows between pairs of countries to their total and per capita national incomes, distance and contiguity, and Eichengreen introduced dummy variables for whether such pairs were members of particular trade or currency arrangements. While members of the Commonwealth already traded eight times more heavily with each other in 1928 than their locations and economic characteristics would suggest, this effect increased by 1935 and again by 1938. The Ottawa preferences and other agreements raised intra-Commonwealth trade by nearly 150% during 1928-35, although this appears to have had no impact on external trade; most of the Commonwealth's apparent `regionalization' therefore reflected its relatively rapid recovery. The German bloc's members traded no more heavily with each other than the simple model predicted, although their external trade fell significantly after 1928. Some of its members also imposed exchange controls, however, and estimates that considered trade bloc membership and the imposition of exchange controls separately produced evidence of trade diversion, which reflected the restricting effects of exchange controls rather than explicit discrimination in commercial policies. Eichengreen then turned to the implications of this analysis for regionalism today. Policies to sustain growth which include the current wave of regional initiatives appear essential to the development of multilateral trade. The NAFTA will both create and divert trade, although the latter effect will be small. Indeed, the US launched earlier regional negotiations with Canada in order to spur the Uruguay Round, while the US also remains firmly but quietly committed to extending NAFTA to the rest of Latin America. The development of the European Community has proved a two-edged sword for multilateralism. Its broadening and deepening create new opportunities for the side-payments that are essential to secure universal acceptance for any multilateral agreement proposed under the GATT. It also enables pro-free trade Germany to restrain French protectionism in return for cooperation on monetary policy, while the growth effects of a successful single-market programme should also promote multilateralism. Nevertheless, a lingering regulatory strand of EC policy-making remains, and lobbying for protection on account of `adjustment problems' is most likely to succeed with respect to exports from outside, as remaining restrictions on agricultural goods and iron and steel from Central and Eastern Europe continue to demonstrate. |
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