Returns to Regionalism: An Evaluation of Nontraditional Gains from Regional Trade Agreements

Abstract

Is there more to regional trade agreements than the traditional gains from trade? The past decade has witnessed an explosion in the number of regional trade agreements. There seems to be a general, if ill-defined, belief on the part of many policymakers and academics that there is more to such agreements than the traditional gains from trade (thus the term new regionalism). Fernandez examines several possible benefits that regional trade agreements may confer on their partners, including credibility, signaling, bargaining power, insurance, and a mechanism for coordination. She assesses the conditions necessary for each of these benefits, gives stylized examples of policies that might bring about those conditions, and discusses the plausibility of those conditions existing. In this light, she examines the North American Free Trade Agreement (NAFTA) and the European association agreements between the European Union and the countries in Central and Eastern Europe. She concludes that regional trade agreements can serve a useful economic purpose beyond the direct gains from trade liberalization, by reducing uncertainties and improving credibility and thus making it easier for the private sector to plan and invest. Indeed, reducing uncertainty may be essential for realizing gains from liberalization. Whether economies benefit from a particular regional trade agreements depends on the scope and coverage of its provisions, the nature of the enforcement mechanism, the circumstances in which the agreement can be amended, and changes in the behavioral incentives for various agents in the economy that result from it. It is important to examine these factors carefully and to evaluate the feasibility of freer trade in their absence when determining the effects of regional trade agreements on world welfare. This paper - a product of the International Trade Division, International Economics Department - is part of the division's Program on Regionalism and Development.