Regional Trading Arrangements and Developing Countries: Understanding the Phenomena

Abstract

One of the remarkable features of international trade has been the explosion of regional trading arrangements (RTAs) especially after 1990. In particular, developing countries have been in the forefront in contracting RTAs, especially among themselves. The period after 1995 is also characterized by the growth of trade among developing countries while their trade with developed countries has been on the decline. It seems that the latter phenomenon is driven by RTAs. India too has been very active in recent years in contracting RTAs. This article argues that the causality seems to be from trade to RTAs rather than the other way round. It is seen that conventional gains from RTAs via tariff reduction do not show up in empirical work. RTAs thus do not lead to increased trade among countries and are, in fact, a de facto rationalization of growing trade relations between countries. It is argued further that the growth in RTAs is explained more by developments in international politics and the emergence of a multi-polar world rather than by the conventional calculus of economic theory.