Globalizing Free Trade: The Ascent of Regionalism

Courtesy Reuters

Economic success in today’s world requires countries to liberalize to attract mobile international investment, which goes far to determine the distribution of global production, jobs, profits, and technology. Success also requires countries to compete effectively in international markets rather than simply at home. A process of competitive liberalization, therefore, has driven the trend toward free trade among a myriad of countries in all parts of the world with very different economic systems, at very different stages of development, and with very different prior philosophies.

Interstate arrangements are usually necessary to implement such liberalization, however, because domestic political opposition frequently blocks countries from abolishing their traditional barriers unilaterally. Entrenched interests fight hard, and often with prolonged success, to maintain their protected positions. Trade reform thus requires mobilizing enough pro-trade interests, especially exporters and others who would gain directly from the opening of markets abroad, to overcome those who resist further market opening. The political economy of trade liberalization in individual countries rests heavily on parallel liberalization in partner countries.

The most assured technique for achieving such parallel action is to insist on reciprocity, through the negotiation of trade agreements with enough existing or potential markets to tip the internal balance in favor of the desired liberalization. In seeking reciprocal liberalization, countries could turn either to their respective geographical regions or to the world trading system as a whole. The global approach is superior because it maximizes the number of foreign markets involved and avoids the economic distortions (and political risks) of discrimination among trading partners.

As the urgency of competitive liberalization has accelerated, however, the regional approach has increasingly come to the fore. It is considerably less complicated to work out mutually agreeable arrangements with a few neighbors than with the full membership of the well over 100 countries in the World Trade Organization (WTO). Moreover, regional groupings are demonstrably willing to proceed more boldly: many of them have decided to adopt totally free trade, whereas none of the global conclaves to

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