At a Brussels joint lunchtime meeting with the European Centre for Advanced Research in Economics (ECARE), Université Libre de Bruxelles, on 12 November, held to mark the launch of CEPR's latest book,* Jaime de Melo discussed the implications of the world's increasing division into regional trading blocs for the multilateral trading system. Formerly Head of the Trade Policy Division at the World Bank, de Melo is now Professor of Economics at the Université de Genève and a Research Fellow in CEPR's International Trade programme. The meeting formed part of the Centre's project on `Market Integration, Regionalism and the Global Economy', supported by a grant from the Ford Foundation. Further financial support from Cambridge University Press is gratefully acknowledged. The views expressed by de Melo were his own, however, not those of the above organizations nor of CEPR, which takes no institutional policy positions.

De Melo noted that the establishment of the European Common Market had led to a spread of regionalism throughout the developing world in the early 1960s. The US endorsed regionalism only for the European Community, however, and then only as an instrument to facilitate multilateral negotiations under the GATT. A second wave began in the mid-1980s, with the US acting as a major player in the Western Hemisphere, largely in response to the slow progress of the GATT. This is the most important reason for the return of regionalism and why it is now likely to stay. European integration has also spread with the Community's enlargement to the South and its conclusion of the European Economic Area (EEA) agreement with the EFTA countries and the `Europe Agreements' with those of Central Europe.

While the `old' regionalism had little impact on trade or production in the South and ambiguous effects in the North, the integration of countries with very different income levels, motivated in some cases by fears of migratory pressures, has been a key feature of the `new' regionalism. While trade creation and diversion were central to integration in the 1960s, the new regionalism has emphasized the creation of institutions and their impact on member countries' policies. Regional arrangements that dilute the influence of lobbyists may induce policies conducive to greater efficiency. The development of trading blocs in the Americas, Asia and Europe may also alleviate the `free rider' problem in the GATT negotiations and hasten the movement towards global free trade by reducing the number of negotiating parties. Integration with large developed countries is also likely to bring credibility to the liberalization policies pursued by developing countries such as Mexico and also encourage their adoption of stable macroeconomic policies.

De Melo warned that regionalism also entails dangers, however, if a `fortress' mentality leads to the use of regulatory barriers to deny market access to non-members. Trading blocs may turn inward over time if industrial interest groups are strong enough to prevent external liberalization. Even the European Community the most successful example of regionalism to date took nearly four decades to embark upon its single-market programme, while it has served to extend national protection to the regional level in agriculture.

De Melo then suggested a number of policy measures to reduce these dangers. Strengthening the GATT rules on antidumping actions and voluntary export restraints can ensure that regional arrangements that are initially trade creating do not become trade diverting ex post. Regionalism should also be based on a `conditional MFN' through the formation of clubs open to all nations willing to adhere to their rules. Reforming Article XXIV of the GATT to allow only Customs Unions will force their common external tariffs down to the lowest level of any member country bound by the GATT; trade diversion will then be minimal and biased towards freer world trade. De Melo conceded that this may be unrealistic for the European Community, which has never been an open club; the expansion of its membership will continue to be as carefully `managed' as in the past.

* New Dimensions in Regional Integration, Jaime de Melo and Arvind Panagariya (eds.), Cambridge University Press, July 1993.