While studying globalisation, The subject of Trade Blocs was brought up, with hindsight, I wondered, aren't Trade Blocs fostering regionalism (as in devotion to the interests of one's own region) as opposed to globalisation? Trade blocs are anti-free-trade since they are essentially barriers to trade from nations outside of the bloc. Since Globalisation is "developed" through free trade as opposed to "regionalisation" of Trade, then are Trade Blocs regionalism and thus anti-Globalisation?
This is an important question in the trade literature. The regionalization of trade is of serious concern to many international economists who view multilateralism as far superior to regionalism for improving welfare.
In a nice paper, Caroline Freund and Richard Baldwin survey the available theoretical and empirical evidence on the relationship between regionalism and multilateralism, with the aim of discerning whether the spread of regionalism is likely to be a threat to, or an opportunity for, broader trade liberalization. I summarize here their main insights:
Two main related concerns raised by the "multilateralists":
- The first is trade diversion: preferential trade agreements, by diverting trade away from the most efficient global producers in favor of regional partners, may prove welfare reducing.
- Regionalism may hinder multilateralism, leading to a bad equilibrium in which several regional trade blocs maintain high external trade barriers. Regionalism can also undermine multilateralism simply by diverting limited government resources from multilateral negotiations.
However the "regionalists" argue that
- it is precisely because the trade diversion is costly to bloc members that there is an incentive to reduce external tariffs. As tariffs fall, trade diversion disappears, and regionalism becomes a force for general liberalization.
Although the verdict is not yet in, the evidence indicates that regionalism is broadly liberalizing. So regionalism does not go against globalization.