The revival of regional trade arrangements: a GE evaluation of the impact on small countries

Abstract

In this paper we analyse the implications of various potential regional trade arrangements on the globe for small, medium, and large countries using a general equilibrium multi-region model of world trade. We show that the effects of regional trade arrangements on member and non-member countries are different for different equilibrium concept and the nature of agreements. In a traditional competitive equilibrium framework the welfare effects are small and non-member nations lose marginally due to a trade diversion. In a non-cooperative Nash equilibrium framework small non-member nations are worse affected. Since the larger regions can bring the terms of trade in their favor by retaliation, and hence could gain from retaliation, the growth of regional trade arrangements is a great cause of concern for the smaller regions. This concern becomes stronger if these trade arrangements are customs unions (CU). This makes small and medium size nations seeking trading arrangement with larger nations as a safe heaven strategy.