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CH 1 INTRODUCTON
1.1 CONCEPTUAL FRAMEWORK
(A)INTERNATIONAL TRADE THEORY
International trade is the exchange of goods and services between the residents of
a given country and those of the rest of the world (Dutta, 2006: 81).
(B)MEANING OF REGIONALISM
Regionalism refers to any policy designed to reduce trade barriers between a subset
of countries regardless of whether those countries are actually contiguous or even
close to each other.
Regionalism,according to Wikipedia,refers to the expression of a common sense of
identity and purpose combined with the creation and implementation of institutions
that express a particular identity and shape collective action within a geographical
region.
According to JOSEPH NYE regionalism refers to the formation of interstate
associations or groupings on the basis of regions.
(C)MEANING OF MULTI LATERALISM
Multilateralism is a charachteristic of the world economy or world economic
system.It ultimately depends on the behavior of individual countries,that is,that
is,the extent to which they behave in a multi lateral fashion.for any one country,the
multilateralism is appositive function of

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(a) The degree to which discrimination is absent,that is ,the proportion of trade

partners that receive identical treatment,and
(b) The extent to which the trading regime approximates free trade.
Sometimes,multilateralism is referred to as process whereby countries solve
problems in an interactive and co operative fashion. Such interactions could clearly
be affected my regionalism.
ROBERT KEOHANE defined multilateralism as the practice of coordinating
national policies in groups of three or more states.

1.2 INTRODUCTION
Do the forces that regional integration arrangements set up encourage or
discourage a trend toward globally freer trade? We don't know yet. The literature
on regionalism versus multilateralism is growing as economists and political
scientists grapple with the question of whether regional integration arrangements
are good or bad for the multilateral system. Are regional integration arrangements
building blocks or stumbling blocks, in Jagdish Bhagwati's phrase, or stepping
stones toward multilateralism? As economists worry about the ability of the World
Trade Organization to maintain the GATT's unsteady yet distinct momentum
toward liberalism, and as they contemplate the emergence of world-scale regional
integration arrangements (the EU, NAFTA, FTAA, APEC, and, possibly, TAFTA),
the question has never been more pressing. Winters switches the focus from the
immediate consequences of regionalism for the economic welfare of the
integrating partners to the question of whether it sets up forces that encourage or
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discourage evolution toward globally freer trade. The answer is, We don't know
yet. One can build models that suggest either conclusion, but these models are still
so abstract that they should be viewed as parables rather than sources of testable
predictions. Winters offers conclusions about research strategy as well as about the
world we live in. Among the conclusions he reaches: Since we value
multilateralism, we had better work out what it means and, if it means different
things to different people, make sure to identify the sense in which we are using the
term. Sector-specific lobbies are a danger if regionalism is permitted because
they tend to stop blocs from moving all the way to global free trade. In the
presence of lobbies, trade diversion is good politics even if it is bad economics.
Regionalism's direct effect on multilateralism is important, but possibly more so is
the indirect effect it has by changing the ways in which groups of countries interact
and respond to shocks in the world economy. Regionalism, by allowing stronger
internalization of the gains from trade liberalization, seems likely to facilitate freer
trade when it is initially highly restricted. The possibility of regionalism probably
increases the risks of catastrophe in the trading system. The insurance incentives
for joining regional arrangements and the existence of shiftable externalities both
lead to such a conclusion. So too does the view that regionalism is a means to bring
trade partners to the multilateral negotiating table because it is essentially coercive.
Using regionalism for this purpose may have been an effective strategy, but it is
also risky.
The term regionalism has been often used in relation to the growth of regional
trade agreements.The emergence of new regional formalities and international
trade agreements like North American Free Trade Agreement (NAFTA),and the
development of European Single Market and the European Union etc .,demonstrate
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the the importance of a region by region basis political co-operation and economic
competitiveness.
Multilateralism refers to the practice promoting trade among several countries
through agreements concerning quantity and price of commodity.
According to preamble of the UN Charter multilateralism means establishing
conditions under which justice and obligation arising from treaties and other source
of international law can be maintained. Multilateralism thus involves
justice,obligation,and a sort of internatonal rule of law
Multilateralism is a term in international relations that refers to multiple countries
working in concert on a given issue. Multilateralism was defined by MILES
KAHLER as international governance of the many,and its central principle was
opposition to bilateral discriminatory arrangements that were believed to enhance
the leverage of the powerful over the weak and to increase international conflict.
Compared to unilateralism and bilateralism where only the country itse lf decides
on what to do or make decisions between two nations,multilateralism is much more
complex and challenging. It involves a number of nations which makes reaching an
agreement difficult. In multilateralism ,there may be no concensus ;each nation
has to decide to some degree, to make the best outcome of all.
Global multilateralism is presently being challenged,particularly with respect to
trade,by emerging regional arrangements such as the European union,
NAFTA,LAFTA and so on.

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Multilateralism is the key, for it ensures the participation of all in the management
of world affairs. It is a gauntee of legitimacy and democracy,especially in matters
regarding the us of force or laying down universal norms.

1.3 MULTILATERAL TRADE AGENDA

The creation of the WTO (WTO, 2011) in 1995 at the end of the Uruguay rounds
conducted under the General Agreement on Tariffs and Trade (GATT) negotiations,
was the largest reform in multilateral trade since the Second World War (WTO,
2011). WTO lays the foundation for international trade through its foundation of a
multilateral trading agenda. All 154 members (by 31.01.2012) (Strong and Herd,
2012), must abide by the set of rules set out in the General Agreement on Tariffs
and Trade (GATT), General Agreement in Trade on Services (GATS) and the
Agreement on Trade-Related Aspects of International Property Rights (TRIPS),
(Appendix 3) (WTO, 2011).The principles of the trade agenda include rules on
most favoured nation, national treatment, freer trade, transparency, promoting fair
competition and encouraging development and economic reform (Appendix 1).
1.3.1 From GATT to WTO
GATT, created after World War Two was a provisional agreement between states
set up to provide the rules for ever increasing global trade during the boom period
after the world wars. From the creation of GATT in 1948 to the end of it in 1994,
the global economy grew faster than it had thus far and what it would in the future
(WTO, 2011). The original intention was to create a third institution, International

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Trade Organisation to handle world trade along with the two Bretton Wood
institutions; The World Bank and the International Monetary Fund (IMF). During
the first round of GATT negotiations, rules for 45,000 tariff reductions were
created affecting a fifth of world Trade (WTO, 2011). Although GATT managed to
decrease tariffs and promote global trade, many argue that GATT was not
successful. Baldwin (2004) points out that until 1970s GATT was a rich mans
club, promoting the welfare of the most powerful nations. Talks concentrated on
food and manufacturing and until 1990s the main focus was manufacturing
although the global economy saw an increase in services and investment, which
would have required closer regulation. Also, the WTO (1997) reminds that the
GATT was formed in the 1940s 12 and by 1980 was not relevant to the realities of
world trade as it had been in the 1940s. GATT also lacked a dispute settlement
system and had loopholes, especially in agriculture that allowed countries to
violate provisions of the GATT, without fear of repercussions (WTO, 2011).
1.3.2 The Case for Open Trade (WTO)
Statistics prove a correlation between open trade and economic growth; hence the
WTO promotes liberation in trade so aggressively. Even during the GATT years,
world trade grew on average by 8% annually (WTO, 2011). The WTO firmly
believes in comparative advantage and that all countries will benefit from an
increase in competition overseas markets provide for countries. Because markets
and technology develop, comparative advantage can shift from country to country
thus supporting free trade which works as a stimulus for nations to advance from
competing in one sector to another (WTO, 2011). According to the WTO,
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outdated, unattractive and expensive products (WTO, 2011). Bagwell and Staiger
(2003) and Ossa (2010) all concluded that the optimal result would be a successful
multilateral trade agreement based on simple policies that would allow countries to
agree on tariff reductions and market access (World Trade Report, 2011). 2.2.3.
Doha Rounds- WTO The most recent trade negotiations began in Doha, Qatar in
2001 (WTO, 2011). The aim of the Doha rounds was to further liberalise trade and
create a multilateral trade system through the introduction of lower trade barriers
and amended trade regulations. Originally the negotiations began on a basis to
reach an agreement on all trade aspects under a single undertaking, meaning that
all aspects were treated as one package. No country could pick and choose the
agreements that suited them best. The negotiations are slow due to the nature of the
single undertaking. Differences have gradually been narrowed, but the negotiations
are dragging because no nation is willing to take on all obligations (WTO, 2011).
13 The main topics of the Doha rounds comprise agriculture, services, market for
nonagricultural products, trade related aspects of intellectual property rights,
relationship between trade and investment, trade facilitation, RTAs, trade and
environment and other trade related matters (WTO, 2011). All the above topics
were included in the WTO rules prior to the Doha negotiations, but allowed
countries to use the present loopholes to create trade diversion. The WTO rules on
RTAs is an essential topic during the Doha rounds due to the enabling clause in the
GATT that allows members to create RTAs, which the WTO finds trade
prohibiting. The rules can be interpreted differently and since most governments
are parties to RTAs this is an urgent matter to be discussed in the negotiations
(WTO, 2011).

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1.4 LIST OF PTAs

A free trade area is basically a preferential trade area with increased depth and
scope of tariffs reduction. All free trade areas,customs unions, common
markets, economic unions, customs and monetary unions and economic and
monetary unions are considered advanced forms of a PTA, but these are not listed
below.
Multilateral

Economic Cooperation Organization (ECO) (1992)

Generalized System of Preferences

Global System of Trade Preferences among Developing Countries (GSTP)

(1989)

Latin American Integration Association (LAIA/ALADI) (1981)

Melanesian Spearhead Group (MSG) (1994)

Protocol on Trade Negotiations (PTN) (1973)

South Asian Preferential Trade Arrangement (SAPTA) (1999)

South

Pacific

Regional

Trade

and

Economic

Cooperation

Agreement (SPARTECA) (1981)

Bilateral

European Union ACP countries, formerly via the trade aspects of

the Cotonou Agreement, later via Everything But Arms (EBA) agreements
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India Afghanistan (2003)

India Mauritius

India Nepal (2009)

India Chile (2007)

India MERCOSUR (2009)

ASEAN PR China (2005)

Laos Thailand (1991)

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Stages of economic integration around the World (each country colored according
to the most integrated form that it participates with):
Economic and Monetary Union (CSME/EC$, EU/)
Economic union (CSME, EU, EEU/EAEU)
Customs and Monetary Union (CEMAC/franc, UEMOA/franc)
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Common market (EEA, EFTA, CES)

Customs union (CAN, CUBKR, EAC, EUCU, MERCOSUR, SACU)
Multilateral

Free

Trade

Area (AFTA,CEFTA, CISFTA, COMESA, GAFTA, GCC, NAFTA, SAFTA, SICA

)vte

1.5 REGIONALISM AS A STEPPING STONE OR STUMBLING BLOCK

1.5.1 Regionalism as a stepping stone for trade
The two major schools of thought in the classical debate of stepping stones versus
stumbling

blocks

are

Larry

Summers

School-of-thought

arguing

that

discriminatory liberalisation is trade liberating, and the Jagdish Bhagwati schoolof-thought supporting the view that discriminatory liberalisation is trade
discrimination (we will return to this later), (Baldwin, 2004). Research supporting
Larry Summers argument has been conducted globally and strongly supports the
school of thought. Krishna (2003 cited in Freund and Ornelas, 2010: 12) conducted
a research by calculating economic gain with the traditional gravity model
(appendix 3) using 24 hypothetical United States bilateral trade agreements,
showing that 80% of the agreements would have been welfare enhancing. Bilateral
trade agreements are also beneficial for trade parties in need of instant
gratification, Heribert Dieters (2009: 395) research paper concluded that bilateral
agreements provide immediate reciprocal gains for a countrys economy, and can
be a useful political tool. Caroline Freund and Emanuel Ornelas (2010) research
paper on RTAs is one of the most recognised recent research papers arguing the
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benefits of bilateral trade agreements. Trade agreements between natural trade

partners result in minimal trade diversion and is largely trade creating. Natural
partners are countries that already conduct a large amount of trade between each
other (Krugman, 1991). Using a model showing natural trade partners spread over
several continents, Krugman (1991) concludes that bilateral trade agreements
between natural trade partners enhances trade because the gains from freeing
intraregional trade are larger and the costs of reducing interregional trade 19 are
smaller (Krugman 1991 cited in Freund and Ornelas, 2010: 12). Freund and
Ornelas (2010) also recognise the benefits of bilateral trade agreements towards a
multilateral framework. Regional and bilateral trade agreements allow countries to
negotiate on rules and procedures that the multilateral framework cannot conduct
due to preceding complicated trade rules (WTO, 2011). The study by Freund and
Ornelas (2010) further supports the WTO view of bilateral agreements supporting
a multilateral framework by concluding that discrimination, if present, can
encourage outside countries to join a multilateral framework in order to minimise
or eliminate the cost of discrimination. The research also shows that a bilateral
trade agreement can be the beginning of deeper integration, including services,
migration and investment. Finally, a study by Baier and Bergstrand (2004 cited in
Freund and Ornelas, 2010: 13) carried out to research which country pairs would
most likely gain from forming RTAs using the general gravity model (appendix 4)
also concluded that forming RTAs is the first step towards deeper integration which
is trade creating for countries. They were the first to empirically show the impact
of country- pairs economic characteristics on the likelihood of the pair having an
FTA (Baier et al., 2011: 1). The research showed that countries that are
geographically close to each other and especially if they are remote from the rest of
the world are more likely to gain from an RTA. Also the larger the GDP of a
country and the difference in the size of the GDP between trade partners, perform
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as a success factor. Economic similarities seem to be key aspects, Baier and

Bergstrand (2005: 24) conclude that a larger difference between the relative factor
endowment and the larger the difference in absolute capital and labour costs
compared to the rest of the world are, the more likely it is that the formation of an
RTA is trade creating.

1.5.2 Regionalism as a stumbling block for trade

The popular perception of trading blocs is one of discriminatory regional
organizations whose principal role is to advance the common economic agenda of
member countries by protecting domestic markets from foreign competition
(Bhagwati 1990). In this sense, trading blocs are regarded as a direct threat to
multilateralism and to the goal of free trade established at Bretton Woods.
According to this interpretation, the international framework embodied by the
GATT/WTO, International Monetary Fund (IMF), and the World Bank has been, or
is in the process of being, replaced by a more limited goal of partial trade
liberalization centred upon regionalism. Accordingly, the decline of commitment to
multilateralism may lead to a break-up of the global trading system and promote
protectionist trading blocs whose competing geo-economics objectives could lead
to an international crisis. The principal trading blocs-NAFTA (perhaps extended to
Latin America), the EU (including East-Central Europe), and the emerging Asian
bloc centring on Japan (and conceivably China)-will become the triad of dominant
actors in future conflicts, while the rest of the world will become increasingly
isolated. As a prominent economist noted, "given the inevitable trade frictions that
will arise between large regional trading blocs-with those left outside, such as the
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East Asian newly industrializing countries and Japan trying to form their own
defensiveblocs-the whole multilateral trading system built up since the Second
World War could un- ravel". Closer investigation of this pessimistic scenario
suggests that the consequences of the emergence of trading blocs are far from clear.
In the 1960s and 1970s, numerous attempts to promote regional arrangements
faltered. The Central American Common Market (CACM), the Andean Pact, and a
number of regional arrangements between African countries
failed to achieve significant intraregional liberalization and integration. This
discouraging history not- withstanding, regionalism experienced a resurgence
during the Uruguay Round negotiations in the 1980s and 1990s. During the fouryear period between 1990-1994, no fewer than 33 new regional integration
arrangements were notified to the GATT (WTO 1995), and many existing regional
arrangements, especially in Western Europe, were deepened and widened. Of the
total of 109 regional agreements notified to GATT between 1948-1994, Western
European countries participated in 76. The collapse of the communist Council for
Mutual Economic Assistance (CMEA) in Eastern and Central Europe in 1991 was
an additional incentive to expand regional integration in Europe. This surge of
regionalism made the Uruguay negotiations more difficult and contributed to its
compromise outcome. Al- though the establishment of the WTO in place of GATT
was hailed as a great success and proof that multilateralism was alive and well,
serious doubts remain over its ability to resolve trade disputes and to achieve the
goal of global free trade . The Uruguay negotiations led to a series of compromises
which, in the end, merely delayed the decisions necessary to maintain the
multilateral framework. For example, agreements on financial services, direct
foreign investment, intellectual property, and agriculture were postponed not
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bloc tensions. Mexico's financial crisis, Japan's deflating economy, America's

currency, and Europe's uncertain progress toward monetary union collectively
ensure a difficult climate for future negotiations on multilateral trade
liberalization. Although there are still geographers and economists who discount
the significance of regionalism and trading blocs, the fact remains that by the time
the WTO was created, nearly all its members had notified GATT that they were
parties to at least one regional integration agreement. If the Asia-Pacific Economic
Cooperation's (APEC) announced objective (November 1995) of achieving free
trade by 2020 is formalized, all WTO members including Hong Kong and Japan
will be parties to one or more trading blocs. Although economic integration theory
and preferential trading agreements have attracted much attention in economics
and political science, geographers have had little to say on these issues. Their
neglect is premised on two mistaken assumptions:
(1) that there is little or no evidence for the regionalization of world trade around
separate regional nodes;
(2) That evidence of restructuring the world economy around Western Europe, North
America, and Japan is not the same as three emerging trading blocs.
As to the first point, the relative importance of regional nodes is evident from an
examination of trading trans- actions using the IMF's Direction of Trade statistics.
Our brief summary begins with the caveat that there are many methods, and
associated problems, for measuring global trading patterns. While this is not the
place to review the relative merits of those different approaches, Grant has pointed
out that the traditional measures and perspectives employed here provide a useful
tool for interpreting and forecasting trade trends. Figure 1 depicts world
merchandise trade and the key roles therein of three regional groupings: the EU (of
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twelve); NAFTA; and Association of South-East Asian Nations (ASEAN) plus

Hong Kong, Japan, South Korea, and Taiwan. This triad of regional blocs
dominated trade in the world economy of 1991. In that year, intra-regional trade
accounted for 38 percent of all the world's merchandise imports and exports. IntraEU trade alone accounted for 24 percent of all such trade. Inter-regional trade is
quite modest by comparison, representing just 10 percent of the world's
merchandise imports and exports. Nearly 50 percent of all world trade occurs
within or between the three major regional nodes (representing only twenty-five
countries). When trade between this triad of regional blocs and third countries are
taken into account (amounting to 19 percent), region- alism's dominant role
becomes clear. This empirical evidence thus makes a strong prima facie case for
regionalism as one of the most influential factors determining world-trade flows.
To what extent these regional flows represent a fundamental restructuring of the
world economy
We will argue that the ongoing conflict between regionalism and multilateralism
represents competing organizing principles of economic integration and trade
which are at the very heart of the economic and social transformation of
contemporary industrial society and international relations. The results of
competition between these two principles of geo-economic relations promise to
have pro- found and far-reaching consequences for the on- going globalization of
the world economy and the transformation of local production districts. The central
question, again, has to do with the consequences of regionalism for global free
trade. Unfortunately, there are no straightforward answers for a question that is one
of the oldest and most contentious issues in economics and regional science.
Strictly speaking, the ongoing debate about the merits of regionalism and trading
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blocs is inconclusive. According to many critics, multilateralism and the WTO are
virtually synonymous. The principal aim of the WTO (and the GATT before it) is
to promote a non-discriminatory open market in which only prices and tariffs
determine international comparative advantage among sovereign nation states.
Through a process of multilateral negotiations involving as many consenting
countries as possible, impediments to the free movement of the factors of
production are gradually removed. While the WTO can be viewed as a trading bloc
itself, the large number of member countries belonging to the WTO makes this
bloc qualitatively different from all other forms of regionalism. Nevertheless, since
not all countries are members, the WTO, at least theoretically, is the largest and
most open trading bloc of all (Figure 2). The goal of free trade enshrined in the
WTO will lead to the optimal utilization of the factors of production in ways that
reflect variations in comparative advantage. Such an optimal allocation will
ultimately lead to an increase in collective welfare of all participants. The WTO is
itself a trading bloc with the goal of facilitating a global free-trading system, first,
by ensuring that most trade impediments are tariff- based and therefore
"transparent"; and, second, by the gradual reduction and removal of these tariffs.
The primary "coercive weapon" of the WTO is the non-discrimination principle
supported by MFN and national-treatment regulations. If non-discrimination is the
core regulating principle underpinning the GATT/ WTO and multilateralism, the
latter's permission of trading blocs and regionalism under this system of
international regulation is paradoxical because regionalism epitomizes the very
opposite of non- discrimination.
Not with standing GATT Article XXIV's allowance for trading blocs, the overall
level of tariffs has been lowered significantly since the inception of the GATT. This
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fact enables supporters of trading blocs to argue that regionalism, if properly

managed and supervised, can foster the process of multilateral trade liberalization.
The pertinent question, therefore, is the extent to which regionalism promotes or
erodes trade liberalization. Neoclassical economists clearly regard trading blocs as
a "second-best" alternative to multilateral free trade (Bhagwati 1988). Their
arguments derive, by and large, from the views of a Canadian economist Jacob
Viner (1950) who provided a more or less definitive analysis of
the trading-bloc issue. Although Viner's concepts of trade creation and trade
diversion were enunciated more than forty years ago, they have been almost
universally accepted by scholars of international trade (Tovias 1991). According to
Viner, a preferential trading arrangement promotes trade creation when a country's
more expensive domestic production is replaced by cheaper products imported
from a participating country. Greater domestic consumption generates additional
trade and welfare in the process. Conversely, trade diversion occurs when imports
of inexpensively manufactured goods from non-member countries are re- placed
by more expensive imports from participating countries. The resulting increase in
intraregional trade takes place at the direct expense of imports from outside the
bloc; hence trade diversion reduces or, at best, does not in- crease global welfare in
this scenario. In other words, if a trading bloc promotes trade creation, it will also
promote global trade liberalization. This simple but powerful theory of trading
blocs survived virtually intact until the late 1980s when the growing disparity
between the theory and practice of international trade and trade regulation became
painfully apparent for participants in the prolonged and acrimonious Uruguay
negotiations. Since then the debate has grown more complex. According to Jackson
(1993), trading blocs can actually promote global free trade if the MFN principle is
applied. More- over, regional trade arrangements can serve as stepping stones for
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building political support and strengthening the will for negotiating freer trade
worldwide (Lawrence 1991; Summers 1991; Krugman 1993). In sum, classical
economic analyses as well as new trade theory are ambiguous about the outcome of regionalism. Under certain favourable political conditions, such as an
unwavering commitment to the MFN principle (even under Article XXIV of the
GATT/WTO), trading blocs can contribute to the goal of global free trade. All the
same, they represent a second-best scenario which, given unfavourable political
circumstances, is prone to complicate the multilateral ideal. Clearly, classical
analysis of the issue of regional integration requires elaboration.

The possibility of regionalism probably increases the risks of

catastrophe in the trading system. The insurance incentives for joining regional
arrangements and the existence of shiftable externalities both lead to such a
conclusion. So too does the view that regionalism is a means to bring trade partners
to the multilateral negotiating table because it is essentially coercive. Using
regionalism for this purpose may have been an effective strategy, but it is also
risky.Regional trade agreements (RTAs) have proliferated around the world in the
past decade. Some 200 RTAs currently in force have been notified to the World
Trade Organization (WTO) and the number will continue to rise given the many
RTAs being proposed and negotiated. It is estimated that, if one takes into account
RTAs which are in force but have not been notified, signed but not yet in force,
currently being negotiated, and in the proposal stage, close to 400 RTAs are
scheduled to be implemented by 2010 (Fiorentino, Verdeja and Toqueboeuf, 2006).
Virtually all countries are member of at least one RTA, with most countries
belonging to two or more RTAs at once. The geographic reach of RTAs has also
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changed over time, making regional somewhat of a misnomer. While most RTAs
are still formed among countries inhabiting the same region or continent, they
increasingly involve members that are not immediate neighbours and create
partnerships spanning oceans. Trans-Atlantic and trans-Pacific RTAs are gaining in
number through such agreements as the European Union (EU)Mexico Economic
Partnership Agreement, the EFTAChile free trade agreement (FTA) and the
recently signed KoreaUS FTA. The economic importance of regional

trade agreements has continued to grow. More than half of global merchandise
trade flows among countries connected by a common RTA. But RTAs are today
increasingly important in areas other than merchandise trade. Indeed, the
architecture of RTAs has become both more comprehensive and more complex.
Besides trade in goods, many RTAs now regulate such subjects as trade in services,
investments, standards, intellectual property

The body of rules governing

international trade has been extended to matters traditionally considered to be

within the realm of domestic regulations (behind-theborder measures). These
developments suggest that RTAs have become a major and strategic part of
commercial policy for many countries. But RTAs also pose important challenges
for the multilateral trading system. Indeed, the growing importance of RTAs has
directed attention to the potential conflicts as well as complementarities between
the rules that are adopted in RTAs (regional rules) and the multilateral rules
established in such agreements as the General Agreement on Tariffs and Trade
(GATT) of 1994, the General Agreement on Trade in Services (GATS) and other
WTO Agreements (global rules). While the GATT had in the past conducted
examinations of RTAs, scrutiny may now become more exacting. The multilateral
Doha trade round launched in 2001 included a negotiating mandate aimed at
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clarifying and improving disciplines and procedures under the existing WTO
provisions applying to RTAs GATT Article XXIV, the Enabling Clause, and
GATS Article V. These negotiations have resulted in a new transparency
mechanism that was adopted by the WTOs General Council in December 2006.
The transparency mechanism obliges Members to notify the WTO of any RTA that
Members enter into and to provide information about the agreement. The
mechanism also mandates the WTO Secretariat to prepare a report on notified

RTAs. While this report on the RTA has to be factual and refrain from any value
judgment, the increased level of scrutiny can alert the rest of the WTO
membership to some of the rules and practices in RTAs that adversely affect nonRTA members. This may induce countries to adopt RTA rules that complement
rather than conflict with existing WTO agreements. The growing policy attention
paid to RTAs finds a parallel in the debate in the economic literature on whether
RTAs are building blocs or stumbling blocs to multilateral trade liberalization.1
These concepts refer to the nature of the dynamics or time paths that RTA
formation can generate (Bhagwati and Panagariya, 1999). RTAs are building blocs
if they accelerate multilateral trade negotiations or progressively enlarge their
membership so that they lead to global free trade. RTAs are stumbling blocs if they
hamper the attainment of global trade liberalization. 1 Bhagwati (1991) first coined
the terms building bloc and stumbling bloc. 2 antoni estevadeordal, kati
suominen, robert teh The stumbling bloc camp argues that RTAs undermine
countries incentives to undertake further multilateral liberalization because
members are unwilling to dilute the preferential access they have to the markets of
RTA partners. Another argument is that RTAs can create incompatible regulatory
structures and standards which lock in the members policies, and increase the
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adjustment costs associated with multilateral liberalization, thus making it less

attractive. The importance of non-economic motives or interests can make RTAs a
stumbling bloc to global free trade (Limao, 2007). RTAs can be valuable to a large
country because the preferential access to its market allows it to extract cooperation in nontrade matters from smaller partners. Multilateral tariff reductions
reduce the value of preferential access to the large market and thus the surplus that
can be extracted from potential RTA partners. Various political-economy models

have sought to show that the establishment of an RTA weakens the motivation of
the members for reciprocal liberalization with non-members. In Levy (1997), if an
RTA produces disproportionately large gains and relatively small losses to the
median voter so that his utility is raised above what could be achieved with a
multilateral deal, multilateral liberalization will no longer be viable. Krishna
(1998) argues that trade-diverting RTAs generate large rents tied to the preferences
granted by the agreement for producers. Multilateral trade liberalization threatens
those rents. If governments are swayed more by producer interests, then
multilateral liberalization will not be pursued. Moreover, the attention that
governments invest in RTA negotiations draws away scarce political and human
resources from multilateral negotiations. There are strong arguments for the
building bloc story as well. Baldwin (1995) has proposed a domino theory of
regionalism where the establishment of an RTA increases the value for nonmembers of joining the agreement.2 The creation of a preferential regional
arrangement will reduce the profits of the firms exporting to the region but who are
located in a non-member country. They will have a reason to lobby their
government to join the bloc. If the regional bloc enlarges as a consequence, the
value of membership for outsiders increases since they face a cost disadvantage in
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an even greater number of markets. This leads to a snowballing of countries which

want to join so that the RTA progressively enlarges its membership until global free
trade is reached. Another building-bloc 2 However, the domino theory does not
explain what incentives existing members have to accept new members.
introduction 3 argument is that preferential trade liberalization will help enlarge the
exporting sectors and diminish the import-competing sectors in RTA members.
Thus a country which enters into an RTA will expand the economic and political

strength of its pro-liberalization constituency (juggernaut effect), making it

possible for its government to cut a multilateral deal (Baldwin, 2005). There are
also those who see RTAs as a stepping stone towards a global free trade policy
(Ethier, 1998). RTAs may help a government intent on carrying out economic
reforms to mobilize domestic forces in support of opening up to the wider world.
By initially entering into a preferential trade arrangement, the reforming country
would be able to capture economic benefits, for example through FDI inflows from
its RTA partners that tilt the political balance within the country in favour of
economic reform and multilateral liberalization. A more recent vein of research has
argued that, as more RTAs are established, the cost to producers of overlapping
rules would lead them to pressure governments to harmonize or multilateralize
these rules (Baldwin, 2006). As bilateral and regional trade agreements proliferate,
a spaghetti bowl of rules of origin will emerge. This, in turn, will run against the
increasing fragmentation of production as firms find it more cost-efficient to locate
the manufacturing of parts and components in different countries. The requirement
to comply with different rules of origin will then raise firms production costs.
Paradoxically, RTA spaghetti bowls can become building blocs to multilateralism
as offshoring becomes a force for the multilateralization of existing regional rules.
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Indeed, there are nascent efforts by some groups of countries in Asia as well as the
Americas to examine ways to connect their common RTAs into broader trade areas
so as to reduce the complexity of rules facing economic actors in the RTAs and to
facilitate more trade and investment. To be sure, the multilateralization of regional
rules may for many still seem to be a long-term aspiration. But what is clear today
is that, given that nearly all WTO Members are RTA members and vice versa,
WTO Members should have an interest in reducing conflicts between regional and

multilateral rules and in ensuring compatibilities between them. Yet, despite the
growing academic and policy attention to regionalism, the anatomy of RTAs
remains poorly understood. Virtually all of the existing mappings that have been
undertaken on RTAs focus on a single RTA discipline rules of origin.3 The lack
of a comparative look at 3 A partial list of the literature includes Estevadeordal
(2000), Suominen (2004), Estevadeordal and Suominen (2005) and Cadot et al.
(2006). 4 antoni estevadeordal, kati suominen, robert teh other RTA rules severely
limits our understanding of the effects of RTAs and provides little foundation for
recommending measures to further compatibilities between regional and global
rules. We therefore take up Richard Baldwins recommendation in this volume to
move the economic professions discussion from high theory to one which is more
empirically grounded and policy-relevant.

1.6 REGIONALISM VERSUS MULTILATERALISM

In the light of the above one suspects therefore that the Second Regionalism will
endure: it shows many signs of strength and few points of vulnerability. But, if so,
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those of us who see virtue in a rule-based, open and multilateral trading system
must ask searching questions as to its compatibility with such discriminatory
trading arrangements. In particular, two major questions must be answered: . Is the
immediate impact-effect of such preferential trade blocs, whether CUs or FTAs, to
reduce rather than increase world welfare? Regardless of the immediate impacteffect, will regionalism lead to nondiscriminatory multilateral free trade for all,
through continued expansion of the regional blocs until universal free trade is
reached, or will it fragment the world economy? And will, in any event, such a

dynamic time-path show that regionalism will get us closer to the goal of
multilateral free trade for all than multilateralism as the process of trade
negotiation will? I shall now treat each of these two important, and distinct (if at
times analytically interrelated), questions in turn.

Is Regionalism Quicker
The regionalists claim that the GATT is the General Agreement to Talk and Talk,
whereas regionalism proceeds quicker. But is this really so? 1, Historically, at least,
the First Regionalism failed whereas the GATT oversaw the effective dismantling
of prewar tariffs in the OECD countries and the enlargement of disciplines over
NTBs at the Tokyo Round and beyond. A little caution, to say the least, is
necessary before celebrating regionalisms quickfootedness. 2. For those who
believe that regionalism offers a quick route to effective trade liberalisation,
Kenneth Dams analysis quoted above needs renewed attention. There is a world of
difference between announcing an FTA or a CU and its implementation; and the
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comparison is not pleasing if you are in the regional camp. 3. As for speed, even
the best example of regionalism, the EC, started almost four decades ago (1957)
and is now into 1992. The transition has not therefore been instantaneous any
more than negotiated reductions of trade barriers under the GATT Rounds. And
this too, despite this enormous political support for a united Europe. 4. Take
agriculture. The record of regional trade blocs dealing with agricultural trade
liberalisation is either nonexistent or dismal. The CAP is not exactly the ECs
crowning achievement. In fact, if it were not for multilateralism (i.e the Uruguay
Round and the coalition of Cairns Group that crystallised around the MTN), it is
difficult to imagine that the process of unravelling the CAP could even have begun.
5. The (actual or potential) exercise of the regional option can also affect

the efficacy of the multilateral one. The unwillingness of the EC to start the MTN
in 1982 and its largely reactive, rather than leadership, role at the Uruguay Round,
are in some degree a reflection of its being less hungry for multilateralism given its
internal market size and preoccupations. Then again, is it not evident that, were it
not for the EC, the capacity of the French (for whose political predicament one can
only have sympathy, much as one deplores its consequence for the willingness to
liberalise agriculture) to slow down the reform of the CAP and the liberalisation of
world agriculture would have been significantly less? 6. Moreover, if regionalism
is available as a realistic option, it will encourage exit rather than the seeking of
voice and even the manifestation of loyalty to multilateralism. This may happen at
the level of the bureaucrats who wind up preferring small-group negotiations
among friends (code phrase: like-minded people) to the intellectually and
politically more demanding business of negotiating with and for the larger
community of trading nations. Else it may happen that, just as public choice theory
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ci la Olson tells us in regard to the diffusion of consumer losses and concentration

of producer gains that favour protectionist outcomes, the proponents of regionalism
tend to be better focused and mobilised (they are often regional experts and
partisans who ally themselves with the preferred policy options of the countries
whose FTA cause they support) whereas the support for multilateralism is often
more diffused and less politically effective and therefore takes second place when
regionalism is on the political scene. Then again, regionalism may appeal to
politicians since it translates more easily into votes: the wooing of the Hispanic
voters, by urging them to identify with the FTA, was quite evident during the
renewal of the fast-track authority last year for the NAFTA negotiations with
Mexico. The support of business groups for multilateralism may also erode with
regional alternatives because of two different reasons: (i) If one can get a deal

regionally, where one may have a great deal of trade, then one may forget about
the multilateral arena. Thus, if Canada could get the US to agree to a fairer
operation of the unfair trade mechanisms, (a matter on 552 JAGDISH BHAGWATI
which many Canadians today feel they were mistaken, with Prime Minister
Mulroney and Mr. Riesman talking about Americans being thugs or like third
world dictators), why bother to fight the battles at the Uruguay Round where the
powerful American manufacturing lobbies, zeroing in with the EC against the Far
East, seek instead to weaken the GATT rules? (ii) Again, one may get better
protectionist, trade-diversionary deals for oneself in a preferential arrangement
than in the nondiscrimjnatory world of the GATT: e.g. Mexicos textile interests
should benefit in the NAFTA relative to Caribbean and other external competitors
in the US market, weakening Mexican incentive to push for reform in the MFA
forthwith. 7. Finally, it is true that the free rider problem looks difficult as the
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number of GATT members increases steadily. Yet, recent theoretical work on

GATT-style trade negotiations (Ludema, 1990) suggests that the free rider problem
may not be an effective barrier to freeing trade. Moreover, as Finger (1982) has
pointed out, and as experience of inadequate GSP concessions underlines,
developing countries have not been able to free ride as much as their exemption
from reciprocity under S&D treatment would imply: the trade concessions on
commodities of interest to them have not gone as far as the concessions on
commodities of interest to other GATT members without such an exemption.
(Unconditional) MFN does not work in practice as well as it should from the freeriders perspective!
b. Is Regionalism More Efficient?
Occasionally, one finds the regionalists arguing that regionalism is also more
efficient: it produces better results. A typical argument is that, as part of the

NAFTA negotiations, Mexico has accepted virtually all the US demands on

intellectual property (IP) protection. A funny story, told in developing country
circles, serves to probe this assertion critically: Ambassador Carla Hills was on a
tour of South America, extolling the virtues of Mexicos capitulation. At a dinner
in her honour in Caracas, she apparently claimed: Mexico now has world-class IP
legislation. At this point, President Carlos Peretz supposedly turned to his left and
remarked: But Mexico does not have a world-class parliament. The true moral of
the story, however, is that, as part of the bilateral quid pro qiios in an FTA or CU,
weak states may agree to specific demands of strong states, in ways that are not
exactly optimal from the viewpoint of the economic efficiency of the world trading
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system. In turn, however, these concessions can distort the outcome of the
multilateral negotiations. This may well have happened with TRIPs and TRIMs at
the Uruguay Round.19 As is now widely conceded among economists, the case for
TRIPs for instance is not similar to the case for free trade: there is no presumption
of mutual gain, world welfare itself may be reduced by any or more IP protection,
and there is little empirical support for the view that inadequate IP protection
impedes the creation of new technical knowledge significantly. Yet, the use of US
muscle, unilaterally through Special 301 actions, and the playing of the regional
card through the NAFTA carrot for Mexico, have put TRIPs squarely and
effectively into the MTN. Again, a distorting impact on the multilateral trade rules
from NAFTA negotiations can be feared from the fact that, as a price for the latter
to be accepted by the Congress during the delicate renewal of fast-track authority,
the US Administration had to accept demands for harmonisation in environment
and labour standards by Mexico towards US standards. This effectively linked in
political circles the case for Free Trade with the demands for level playing fields
or Fair Trade (extremely widely interpreted),2 legitimating these demands and

weakening the ability of economists and of governments negotiating at the GATT

(multilaterally for arms length Free Trade) to resist this illegitimate constraint on
freeing trade.

c. Is Regionalism More Certain

Much has been made, in the Mexican context, of the argument that the FTA will
make trade liberalisation irreversible. But something needs to be added here:
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GATT also creates commitments: tariffs are bound. (This does not apply to
concessions made under conditionality, of course, by IMF or IBRD.) Mexico is a
member, if recent, of the GATT.

Recall Dam (quoted above): Article XXIV is so full of holes in its discipline that
almost anything goes. Reductions of trade barriers can be slowed down, as
circumstances require, other bindings can be tom up by mutual consent (an easier
task when there are only a few members in the bloc but more difficult under the
GATT), etc. Recall too that regional agreements have failed (LAFTA) and
stagnated (ASEAN) as well. The current mood in Canada over NAFTA is sour and
the MTN looks better in con~equence.~~ The sense however, that the US has let
Canada down and failed to live by the spirit of the FTA agreements will probably
not endure. But who knows

Concluding Remarks
The question of regionalism is thus both a difficult and delicate one. Only time
will tell whether the revival of regionalism since the 1980s will have been a
sanguine and benign development or a malign force that will serve to undermine
the widely-shared objective of multilateral free trade for all. My judgement is that
the revival of regionalism is unfortunate. But, given its political appeal and its
likely spread, I believe that it is important to contain and shape it in ways sketched
here so that it becomes maximally useful and minimally damaging, and consonant
with the objectives of arriving at multilateral free trade for all.

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CHAPTER 2 REVIEW OF LITERATURE

2.1 LITERATURE REVIEWED

Bhagwati (1993) first questioned the validity of this assertion, pointing to
an earlier important contribution by Lipsey (1957) that had spelt out the welfare
improvement criteria in a specific model that differed from the ones defining the
natural trading partners. Subsequently, Bhagwati and Panagariya (1996) offered
a systematic critique of the natural trading partners hypothesis.

Regarding

proximity as the basis of welfare-improving unions, they demonstrated that ceteris

paribus, a union with a proximate partner could be more harmful than with a
distant one. Regarding the volume-of-trade criterion, following Panagariya (1996),
they pointed out that there was a presumption that the more a small country
imported from its union partner, the more it would lose from liberalizing
preferentially! As long as the country continued to import from the outside world,
the price facing its consumers and producers would not change. Therefore, it
would fail to reap any efficiency benefits that accrue via the decline in the internal
price when liberalization is non-discriminatory. Instead, the country would lose
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tariff revenue on good imported from the partner country with the lost revenue
transferred to the latters exporters.
Bhagwati and Panagariya (1996) went on to further point out that it is easy
to construct models in which the initial volume of trade bears no relationship to the
welfare effects of preferential trade liberalization.

Moreover, the large initial

volume of trade may itself be the result of existing trade preferences. Finally, they
pointed out that the volume-of-trade criterion was neither symmetric nor transitive.
Being its largest trading partner, the U.S. is a natural trading partner of India but

the reverse is not true. Likewise, the U.S. may be a natural trading partner of both
Mexico and Canada but Mexico and Canada may not be natural trading partners of
each other.
It is fair to say that the powerful critique by Bhagwati and Panagariya
(1996) has now been widely accepted and one hears little justification of PTAs on
the grounds of the natural trading partners hypothesis. While the simple verifiable
criteria that would allow us to judge whether a union is welfare improving or
welfare worsening remain illusive, the Kemp-Wan approach to customs unions,
recently extended to free trade areas (FTAs) by Panagariya and Krishna (2002),
does offer a neat trick to get around the trade diversion problem by adjusting the
external tariff appropriately.1
Kemp and Wan (1976) demonstrated that if two or more countries form a
customs union setting the common external tariff vector such that trade with
outside countries remains precisely at its pre-customs-union level, the outcome is
1
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necessarily weakly welfare superior to the initial equilibrium for the union as a
whole and the world. As I illustrate in my comprehensive survey of the theory of
PTAs (Panagariya 2000) using a simple partial-equilibrium example, freezing the
external trade vector would typically require the union members to lower trade
barriers on the outside countries as well, which helps eliminate trade diversion that
would otherwise result. Once trade diversion is eliminated by giving the outside
world trade opportunities that are as good as those prior to the formation of the
union, union members can improve their welfare by exploiting trade creation

opportunities among themselves. As noted above, Panagariya and Krishna

(2002) have recently extended the Kemp-Wan theorem to the case of FTAs.
Cooper and Massell (1965), Johnson (1965) and Bhagwati (1968)
independently developed an alternative approach to welfare-improving customs
unions in the context of developing countries wanting to achieve a certain level of
industrialization. The essential idea was that if a group of developing countries
wanted to achieve an exogenous level of industrialization [essentially in the form
of a non-economic objective analyzed by Bhagwati and Srinivasan (1969)], they
could do so at a lower cost by specializing among themselves through a customs
union. Recently, Krishna and Bhagwati (1997) have formally proved this result by
ingeniously marrying the Kemp-Wan approach with the theory of non-economic
objectives.
Finally, Jagdish has shown how the analysis by Bhagwati and Brecher (1979) and
Brecher and Bhagwati (1981), analyzing how national welfare in a small open
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economy is impacted due to exogenous changes in the terms of trade and outside
tariffs in the presence of foreign-owned factors, has immediate applicability to the
analysis of the welfare impact on members of a Common Market such as the
European Union. The analysis easily lends itself to questions such as the welfare
effects of exogenous changes in external EU tariff on individual member countrie.

CHAPTER 3 DISCUSSION AND ANALYSIS

A Wealth of research and literature is found on the topic; however, a
consistent theme is the lack of consistency in the methodologies and intellectual
bases of the research or in its conclusions (Schiff and Winters, 2003: 12). It is
obvious that there is almost as many theories and conclusions in the research of
regionalism and trade agreements as there are researchers, therefore it is always
important to appreciate all points of view while reading through the literature.
Although the focus is in a future with little or no barriers to trade, and even though
very little has been achieved on a multilateral scale, Regionalism must be viewed
in the context of a global trading system that has delivered great benefits to the
world over the past 50 years (Schiff and Winters, 2003: 12)
3.1. Multilateralism

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The creation of the WTO in 1995 has been the largest step towards multilateralism
since the 1940s. It regulates international trade through a multilateral trade agenda
and a set of rules and agreements that all 154 members must abide by. Although
regulation of international trade began already in 1948 with the signing of GATT, it
has been generally agreed that although taxes were decreased, GATT failed due to
the level of authority an agreement without legal obligations could achieve. WTO
aggressively promotes trade liberalisation because statistics have proved a
correlation between open trade and economic growth. Also, as competition
increases with trade openness, it is possible for developing nations to gain
comparative advantage and therefore increase the nations welfare. WTO also
recognises the negative impact protectionist methods generate and agrees with

much of the literature on the trade diverting effects of regionalism. 37 The failure
of the Doha rounds which began in 2001 is an on-going problematic issue for the
WTO. The focus of the negotiations is trade liberalisations achieved under a single
undertaking, however as many scholars have noted, it is likely to be impossible to
have 154 member states agreeing on all points in the single undertaking especially
considering the differences in both the development stage of a country and the
resources of the nation.
3.2. Regionalism
Regionalism has attracted studies for many decades and not least for the historical
patterns that can be detected. Large economic fluctuations and changes seem to be
the catalyst for the phenomenon. There is a difference between traditional
regionalism which included colonisation and modern or neo regionalism which in
theory should be welfare enhancing and trade creating for all members of a
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regional agreement. Regionalism follows a wave like pattern and has been
developing since the colonial time. The pre-EU treaties and agreements seem to
have been the first proper regional trade areas or unions; this however is only the
case if geographic regions are not included. Regionalism is studied from many
perspectives and is as popular a research subject as multilateralism is. Regionalism
is mostly deconstructed by looking at the political and economic implications on
both the members of a preferential agreement as well as on those nations left
outside of it. There is no correct answer to why regionalism occurs. Schiff and
Winters (2003: 11) answer to the question of why write another book on
regionalism by stating that regionalism is still a very fertile area for research, with
new results and interpretations emerging everydayso a straight forward

presentation of the more important recent developments is desirable. Also De

lombaerde (2006: 1) recognises the heterogeneous nature of regionalism and that it
requires a multidisciplinary approach. The most common perception is that
globalisation and the failure of a multilateral trade agreement push nations to seek
regional partners, especially smaller economies that seek 38 regional partners in
fear of exclusion. Regional agreements are also established to neutralise beggarthy-neighbour policies, to avoid terms of trade prisoner dilemma, a production
relocation effect and the Nash equilibrium, which are all situations where unilateral
policies cancel each other out.
3.3. Trade Creation vs. Trade diversion
The traditional stepping stone vs. stumbling block debate on regionalism is the
most common argument and research topic in regionalism. As De Lombaerde
(2006: 1) explains, there is no evidence of regionalism contributing to the failure or
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success in a multilateral scheme. It is accepted that regionalism and preferential

treatment is against the GATT principle of non-discrimination, however, also WTO
has admitted that regionalism may encourage multilateralism and forming RTAs is
beneficial for member states. Larry Summers school-of-thought which supports
regionalism believes that regionalism is trade creating; a stepping stone. Much of
the limited amount of empirical studies conducted in regionalism supports this
argument. Krishnas research (2003) proved that a majority of hypothetical trade
agreements would be welfare enhancing. Trade between natural partners is usually
already intense and thus deeper integration would have a positive effect.
Regionalism may also promote multilateralism through discrimination as countries
left outside agreements will pursue multilateral trade negotiations. Jagdish

Bhagwatis school-of-thought opposing regionalism argues that regionalism is

trade diverting and an obstacle to a multilateral framework. The general opinion is
that regionalism is a substitute for multilateralism and therefore and obstacle as
focus shifts away from a multilateral framework. Regionalism is against the
mercantilist view and diverts production away from the most effective countries
resulting in the increase in consumer prices which leads to a trade surplus and
inefficiency. Dominant countries can also through trade agreements manipulate
trade to their own advantage, especially in agreements with developing countries
leaving the country in a disadvantageous position. Because bilateral agreements
are not supported by the 39 advisory centre for WTO law that would otherwise
provide legal advice to developing countries involved in a dispute (Dieter, 2009:
398), countries with little market power would need to protect themselves through
other means. Nationalising a product is a widely discussed issue in regionalism
because it is seen as a negative form of protectionism. Rules of origin are
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separately decided upon for each trade agreement and create a bureaucratic, costly
and confusing procedure for trading countries. Although trade agreements are
assumed to decrease and gradually remove border protection between trade
partners, ROOs create another form of protectionism and in certain situations
create an imbalance between partners because exporters in low-tariff countries are
effectively subject to the same conditions as firms in the hightariff country
(Krueger 1999 cited in Freund and Ornelas, 2010: 37). Concluding from this,
countries must carefully calculate the benefits of a bilateral trade agreement
compared to the costs of one.

CHAPTER 4 CONCLUSION.
It is impossible to resolve the regionalism versus multilateralism dispute. Most
analyses of most FTAs,including most importantly by far the European Union,
conclude that trade creation has dominated trade diversion. Most of the analysts
agree that regional and global liberalization have proceeded together
While FTAs are being negotiated all over the world with India not being and
exception to the trend,their popularity can be explained in large measure to the
deadlock in the Doha round of trde negotiations. This deadlock is however seen by
many analyst to be temporary
It would seem that there is a domino effect in regionalism in other words, an action
results in a reaction which then begins a series of events. The dissertation suggests
that regionalism is a reaction to globalisation, because it offers governance in trade
issues. This seems to be partly caused by the failure of the Doha rounds and partly
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due to the economic turbulence of recent years. The more regionalism occurs, the
more agreements are signed in fear of exclusion from the world markets. It is
suggested that small neighbouring countries with similar concerns form trade
agreements to open up new markets and opportunities while transnational
companies pursue them in order to open up closed markets. Even protectionist
countries form trade agreements, because multilateralism would expose them to
extensive competition. Extensive competition could also create a production
relocation effect or a terms-of-trade prisoner dilemma which is avoided through
regional trade agreements.
It is suggested that we change our approach to the issue of bilateral or regional as
opposed to multilateral trade agreements from one that seeks to identify the merits
of one over the other,to one that actually seeks to create a synergy between the two.
As stated before,bilateral and regional agreements are here to stay and they are
infact a necessary part of the world scenario. The challenge is not to make them
disappear ,but to integrate them and to multilateralise what is happening at the
regional and bilateral level. This will,indeed, even complement the PTAs by filling
the gaps that they leave out by providing a stronger multilateral structure within
which PTAs can be integrated without harming the overall balance

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