International political economy and trading blocs

The world economy is undergoing a revolution. The most perceptible reflection of this revolution is the shift in the balance of power by imposing regional trade agreements building blocs for a strong multilateral trading system. The purpose of this paper is to examine the impact of these regional trade agreements building blocs on multilateral trading system. In global markets it is always been tried to form new initiatives that can facilitate multinational trade areas.

But the major issue in focus is always that how these initiatives can herald the demise of an open world trading system and the move to a more conflictual, tripolar system of trading blocs. This paper discusses the emergence of several regional trading arrangements (RTAs) and trading blocs in recent years poses major new challenges to the global trading arrangements. This paper will also examine the successful free trade agreements that share political cohesion to smooth the disputes that are bound to surface periodically as economic interpenetration accelerations.

This paper will further examine the future of the major trading blocs as well as emerging trading blocs. As RTAs signify both a challenge and an opportunity for the multilateral trading system. The prospect is to use them as investigational laboratories for co-operation on issues that have not yet been addressed multilaterally. The challenge is to manage them. Multilateral control under WTO auspices will depend significantly on the willingness of affected WTO Members to summon compensation and dispute-settlement mechanisms, and on making certain that RTAs are open and transparent. Main Body

The theory of regional integration has established that there is nothing intrinsically harmful or damaging concerning free trade areas or customs union. So long as they effect in net trade creation, the effect on global economic welfare is affirmative. The provisions of Article XXIV go several ways in ensuring that this will be the case. Particularly, while not precluding the prospect that a CU/FTA could result in net trade diversion, the obligation that the average level of outer tariffs after the formation of the CU/FTA must be no higher than the level before increases the possibility that net trade creation will be the outcome.

“FTAs may, however, still be harmful from a global perspective if they hinder further multilateral liberalization”. (Emanuel Ornelas, 2005) Moreover, such evidence as is obtainable would suggest that, to date, most regional trading blocs formed amongst developed countries have resulted in net trade creation. Early attempts at regional integration amongst developing countries were less successful and can have resulted in net trade diversion. Even then, though, the effect on global economic welfare was marginal (Andrew Mitchell, 2005).

Impact Growth of the New Regionalism In certain ways, regional trading blocs might actually speed up the process of global trade liberalization. Economists argue that an essential condition for preferential liberalization to be deemed multilaterally satisfactory is that the volume of imports by member countries from the rest of the world must not decline on a product-by-product basis after the implernefitation of the agreement (Kemp and Wan, 1976; McMillan, 1993).

Import volumes are a purpose of the extent of trade diversion, the trade-policy stance taken concerning the rest of the world, and the brunt of regional liberalization on the growth of member economies. The latter will sequentially depend on how wide-ranging the regional agreement is with respect to sectoral coverage and the exclusion of intra-regional barriers to contesting markets. The trade volume test will detain these various kinds of effects, but only after the fact as in principle it could be used as the root for ex post compensation claims by countries that turned out to be pessimistically affected by the formation or enlargement of an RTA (regional trade agreement), neither GATT nor the GATS permits for such claims, nor is a trade-effects test requisite.

The empirical literature suggests that the trade-volume test has been met in the past. Though the force of intra-regional trade has increased this century, the inclination of regions to trade with the rest of the world, expressed as a percentage of their GDP, has also expanded (World Bank, 2000).

Anderson and Norheim (1993) asserted Global integration as measured by trade flows and capital flows does not emerge to have been affected pessimistically by regional integration efforts. However, this cannot be said with assurance, as no one knows what would have happened without RTAs. Whatever past history can suggest regarding the effect of RTAs on non-members, there obviously are causes for distress about the proliferation of RTAs observed in the last ten years. What matters is not presently the economic impact of a particular agreement, but the systemic effects of RTAs.

For instance, the threat of contingent protection, particularly AD, has become a significant incentive for third countries to seek to join RTAs as opposed to the detection of MTNs (Hindley and Messerlin, 1993). Whether RTAs lean to be constant with multilateral liberalization depends on the incentives that are formed inside RTAs with respect to their external trade policy attitude, and the reactions of non-members. Liberalizing World Trade and Multilateral Trade Liberalizing world trade through multilateral trade negotiations undergoes from a number of problems.

The first is the alleged ‘free rider’ problem. Because the GATT/WTO is based on the standard of unconditional MFN, any country will constantly be tempted to offer as little as probable in concessions, knowing that it will mechanically receive whatever reductions in barriers other countries confer among themselves. Recognizing this setback, the General Agreement makes it obvious that countries are estimated to act reciprocally, that is, to proffer concessions to other countries and not just to promote from concessions which other countries make.

Though, even when countries are ready to act jointly, they may still be forced from making big concessions if they sense that other countries are seeking, in several measures, to ‘free ride’. This gives rise to what Wonnacott (1991) has called the ‘convoy problem’, that is, that the least willing participant dictates the rapidity of negotiations. A second problem with multilateral agreements is that they can take a long time to negotiate both as of the number of countries concerned and the complexity of the agenda.

There are more countries that have to concur to any package of measures negotiated and a more compound web of trade-offs may be desired. Each round of GATT has got bigger and more complex. As a result, negotiations have leaned to drag on for longer. For example, the Tokyo Round took six years to entire and the Uruguay Round seven years. Conversely, the variety of issues covered in regional negotiations is often broader and sometimes more compound than in multilateral negotiations. Few regional agreements are concerned simply with lowering tariffs on trade in goods.

The majority also seeks to tackle non-tariff barriers and might extend to other issues such as investment, services, free movement of labor and antagonism policy. In this respect, regional trading agreements might involve more multifaceted negotiations. One problem is that of so-called ‘sequencing’. While a country already has a regional agreement with another country, the negotiation of a new agreement with a subsequent country potentially reduces the worth of the preferences enjoyed by the first.

As a consequence, it might be necessary to renegotiate the first agreement to offer the partner unfavorably affected some enhanced benefits as compensation (Eric Bond, Constantinos Syropoulos and Alan Winters 2001). Although regional trading agreements can comprise stepping stones towards free trade, there are a number of ways in which their propagation may weaken the attempt to achieve free trade. First, there is a danger that the time used up on negotiating regional trading agreements will deflect the energy and resources of governments away from the need to attain further global trade liberalization.

In this case, regionalism will demoralize and not reinforce multilateralism. Thus, in the Uruguay Round negotiations, the pre-occupation of the US with the negotiations to set up NAFTA temporarily acted as a disruption. “The Uruguay Round of MTN’s (1986-94) was the first multilateral breakthrough in bringing agricultural trade under the same GATT disciplines faced by other sectors. The Uruguay Round Agreement on Agriculture prohibits the use of nontariff barriers (with a few exceptions), reduces tariff levels, and disciplines trade-distorting domestic and export subsidies.

New negotiations to continue the reform process are scheduled for 1999-2000” (Sheffield Sharon, 1998). Finally, there is the threat that regionalism might lead to improved protectionism. As trade barriers are reduced inside, steeper barriers can be erected against imports from the rest of the world. One cause for this is that, for an individual country, the costs of imposing restrictions on imports from a supplier from the rest of the world are worse if that country is part of a regional trading bloc.

This is as restrictions need only be imposed on extra-area imports therefore reducing the number of trading partners it risks displeasing. Another reason is that large trading blocs have an inducement to assert monopolistic power by imposing optimal tariffs in an attempt to shift the terms of trade in their support. A further reason can be that the internal decision making process of trading blocs is more probable to result in protectionism against imports from the rest of the world than that of an individual country.

“Bhagwati (1992) and Krueger (1995) express strong concerns about the negative effects of growing regionalism and they worry that RTAs divert attention from the multilateral trading system” (Crawford, Jo-Ann and Sam Laird 2001). Winters (1994) give numerous reasons for how this happens within the EU. First, the require for the European Commission to increase the support of individual member states if it is to be effectual forces it to ‘broker compromises’ with national governments.

This, he argues, supports a drift towards generalized protection in EU trade policy. It also creates better opportunities for Community-wide lobbies (e. g. farmers, steel producers, etc. ) to take pressure to bear, not only on the Commission, but also member state governments. Another cause is the so-called ‘restaurant bill’ problem. This is pertinent to the fortitude of agricultural prices in the EU. If a party of people go out for a meal together and everyone is requisite to put in equally to the cost of the bill, each person will have whatever item on the menu brings them the most fulfillment with little regard for the cost. In the EU, the costs of the CAP are borne jointly by consumers and taxpayers (Winters, 1994).