Contents 

Preface xi 
Abbreviations and Acronyrns 

Chapter 1. Regional Integration Agreements: An Overview 1 
RIA'H'41. lo- 
s In IStOry " c'" 
Why Regionalism? 6 ~ Why Another Book on Regionalism? 10 '\, Summary 13 J 
Regiona/ism as Trade Pa/icy .1 Making the Mast af Regiona/ism Regiona/ism and lnvestment Grawth and Lacatian 
.lntegration af Domestic Po/icies Regiona/ism as Po/itics 
Regiana/ism and the Rest af the War/d Ru/es af Thumb far Regiona/ism 
Appendix. Selected Regional Integration Agreements with 

Developing Country Members 26 

Notes 29 

Chapter 2. How Trade Blocs Increase Trade and Competition 
Increased Trade between Members of Trade Blocs 32 Is More Trade Good, or Bad? Trade Creation and Trade Diversion 33 
Growth of Trade over Time 36 
Not AII Changes Come from Regionalism 40 
A Change of Perspective: Imperfectly Competitive Markets 

111 

31 

46 

REGIONAL INTEGRAllON AND DEVELOPMENT 

Larger Markets, More Competition 50 
Appendix. The Simple Analytics of Trade Creation and Trade Diversion 54 
Notes 59 

Chapter 3. Making the Most oí Regional Integration 63 
Free Trade with Whom? 64 "- Why Not with Everyone? 
Choosing Partners: The "Natural Trading Partners" Fallacy Choosing Partners: Comparative Advantage Neighborhood RIAs 
North-South or South-South RIAs How Many RIAs? 75 
Free Trade Areas and Customs Unions 78 
Trade Deflection and Rules of Origin: More Protection Indirect Trade Deflection: Exporting Protection 
Customs Unions Offer Lower Trading Coses and Greater Integration 
Externa! Trade Policy 82 
Setting External Tariffs in an FTA: A Race to the Bottom? Trade Policy Institutions in Customs Unions Can Increase 
Protection 
Lobbies Bias RIAs toward Trade Diversion 
RIAs Open a New Environment for Lobbying RIAs and Protection: Summing Up 
Integration and Taxes 94 
Fiscal Compensation 
Tax Competition Notes 100 

Chapter 4. Stimulating IQvestment 101 Investment Policies 103 
Investment Planning: A Dead End Bilateral Investment Treaties 
Treatment of Investment in Current Regional Arrangements Multilateral Investment Agreements 
Integration as an Aid to Credibility-Not an Automatic Effect 107 
RIAs Allow Bad Policy to Be Punished 
RIAs Can Affect the Incentives for Good Policies 
RIAs Can Signal Government's Reform Intentions- If Genuine 
Regional versus Multilateral Routes to Credibility RIAs as Investment Stimuli 113 
Integration Affects Incentives to Invesi 
Investment Does Not Necessarily Mean Growth in RIAs 

Regional Integration and Foreign Direct Investment Motives for FDI 
Evidence of the Positive Effects of Integration Notes 121 

Chapter 5. Growth and Location 123 
South-South and North-South Regionalism as Stimulants to 
Growth 124 
Knowledge and 1nstitutions as Keys Trade, Convergence, and Spillovers 
Choosing the Wrong Partners Can Harm Growth ' FDI and Knowledge Spi//overs 
Cross-Country Evidence on Openness and Growth . Agglomeration and Industrialization 137 
The Balance between Centripetal and Centrifugal Forces 
Trade Liberalization Can Aid 1ndustrialization 
1ntermember Distribution: Divergente ls Likely in South-South R1AS 
Notes 144 

CONTENTS 

Chapter 6. Integrating Domestic Policies .147 Defining Policy Integration 149 
The Baseline: National Treatment 
Beyond National Treatment: Policy lntegration Modes of Policy lntegration: Coordination, Harmonization, and Recognition 
The Economics of Policy Integration 154 1 
Transactions Coses 
Policy lntegration to lncrease Competition Spillovers 
Compensation and Enforcement 
Local versus Regional versus Global Cooperation 
Polic'y Integration to Date: More Promise Than Reality 174 
Coverage 
Depth of lntegration: A Function of Political Objective Prospeéts for Policy lntegration in RIAs 
Conclusion 183 Notes 183 

117 

v 

Chapter 7. Regional Integration as Politics 187 
Regional Integration as a Means of Reducing Frictions between Antagonistic Neighbors 188 
Trade as a Promoter of Peace RIAs as Promoters of Peace 
RIAs Are Not Always Effective Routes to Peace 

REGIONAL INTEGRAll0N ANO DEVELOPMENT 

RIAs and Social and Political Pressures: Potentially Helpful, but Not a Panacea 196 . 
The Role of Regional Integration in Strengthening Democracy and Political Institutions 198 
Regionalism and the Nation-State 201 
Regional lntegration to Deal with Outside Threats and Regional Hegemons 
Regional lntegration and Negotiations with the Outside World Notes 206 

Chapter 8. 

Trade Blocs and the Rest of the World 209 Trade Discrimination: Still Significant 210 
Trade Diversion and Excluded Countries 212 Evidence of Trade Diversion 
Loss of Exports to Trade Diversion 
The Effect of Large RlAs on Nonmembers' Terms of Trade 
The Road to Multilateralism: Are RIAs Stepping Stones, or Millstones? 221 
Multilateralism as a Process Negotiating Power of RlAs 
Regionalism and Tariff Levels 
Has Regionalism Spurred Multilateral Negotiations? Domino Regionalism 
Regionalism as lnsurance 
RlAs as Negotiating Partners: Do They Promote 
Free Trade? 
Do RlAs Make lt Easier to Tackle Tough lssues? Open Regionalism: Little More Than a Slogan 
Regionalism and the WTO 244 GATI:; and All That 
The Rules for RlAs: Useful, but Not lnfallible Proposalsfor lmproving the Rules on RlAs: "Feasible' 
and "Desirable" Do Not Overlap 
Conclusion: Rules Are Not the Answer Notes 256 

Chapter 9. Rules of 

humb for Regionalism 

261 

Annex. 

Selected WTO Provisions on Regional Integration Arrangements 267 

Bibliography 

m 

Index 

2.99 

LIST OF BOXES 

Box 1.1 Box 1.2 Box 1.3 Box 2.1 

Box 3.1 Box 3.2 Box 3.3 Box 3.4 Box 4.1 Box 4.2 

Box 4.3 Box 5.1 Box 5.2 

Box 6.1 Box 6.2 

Box 6.3 

Box 6.4 

Box 6.5 

Box 6.6 

Box 

Box 7.2 Box 7.3 Box 7.4 

Box 7.5 Box 8.1 Box 8.2 Box 8.3 Box 8.4 Box 8.5 Box 8.6 

Defining Te! What the Pc What the Tr Computable 
and a He Rules of Ori 
Restaurant 1 
Pressure Grc Taxes: A Ra NAFTA and Credibility ( 
Program] Will RIAs E Modeling th The Influenc 
America Defining Te! Harmonizat 
Complen When Is No 
of Recycl Antitrust La 
165 Labor Polici Bottom" 
Multilateral 172 
Trade and P 
Lineup 
Modeling TI Democracy Trade Prefe! 
202 
CARICOM 
Trade Diver Stepping St( RegionalislT Is Open Acc Insurance PI The Overbu 

CONrENTS 

LIST OF BOXES 

VII 

Box 1.1 Box 1.2 Box 1.3 Box 2.1 

Box 3.1 Box 3.2 Box 3.3 Box 3.4 Box 4.1 Box 4.2 

Box 4.3 Box 5.1 Box 5.2 

Box 6.1 Box 6.2 

Box 6.3 

Box 6.4 

Box 6.5 

Box 6.6 

Box 7.1 

Box 7.2 Box 7.3 Box 7.4 

Box Box Box Box Box Box Box 

7.5 8.1 8.2 8.3 8.4 8.5 8.6 

Defining Terms: What's in a Name? 2 
What the Politicians Say: Hopes and Rationales for RIAs 7 What the Treaties Say: Aims and Objectives 8 
Computable General Equilibrium (CGE) Modeling: An Explanation and a Health Warning 48 
Rules of Origin Are Protectionist 80 
Restaurant BilIs, Universalism, and Protection 87 Pressure Groups and MERCOSUR 91 Taxes: A Race to the Bottom 99 
NAFTA and the Credibility of Mexico's Policy Reforms 109 Credibility on Deep Integration: The European Single Market 
Programme 110 
Will RIAs Enhance Credibility in Mrica? 112 
Modeling the Agglomeration Effects of RIAs 139 
The Influence of Regionalism on Within-Country Location: North America 144 
Defining Terms: "Deep" and "Shallow" Integration 151 Harmonization and Mutual Recognition as Substitutes or 
Complements: The EU Experience. 154 
When Is Nondiscrimination Discriminatory? The Economic Effects of Recycling Requirements 159 
Antitrust Law Competition by U.S. States in the 19th Century 165 
Labor Policies in U.S. States: Spillovers, but No "Race to the Bottom" 166 ! 
Multilateral Policy Integration and the Enforcement Role~f RIAs 172 
Trade and Peace: The Political Lineup Follows the Economic Lineup 189 
Modeling Trade and Security Externalities 191 Democracy in MERCOSUR 199 
Trade Preferences Do Not Inevitably Lead to Political Integration 202 
CARICOM and .International Negotiations 205 
Trade Diversion and Investment Switching in Europe 220 Stepping Stones, or Millstones? A Summary 222 Regionalism and Protection 227 
Is Open Access the Key to Benign Regionalism? 233 Insurance Policies 237 
The Overburdened Negotiator 240 

Vlll 

LIST OF FIGURES 

REGIONAL INTEGRAnON AND DEVELOPMENT 

Figure 1.1 Regional Integration Agreements, Notified and Active, 1948-April 
2002 3 
Figure 2.1 Share of Imports from Partners in Selected RIAs, One Year before and Five Years after Implementation 32 
Figure 2.2 Intrabloc Imports as a Share of GDP, Selected RIAs, One Year before and Five Years after Implementation 37 
Figure 2.3 Extrabloc Imports as a Share of GDP, Selected RIAs, One Year before and Five Years after Implementation 38 
Figure 2.4 Intrabloc Import Propensities, Selected RlAs, One Year before and Five Years after Implementation 39 
Figure 2.5 Extrabloc Import Propensities, Selected RlAs, One Year before and Five Years after Implementation 39 
Figure 2.6 EU Trade, 1980-96 43 
Figure 2.7 Effect of RIAs on Trade within and among Blocs, Selected Periods, 
1980-96 45 
Figure 2A.l The Market for a Single Homogeneous Good 55 Figure 2A.2 An RIA with a Small Partner 57 Figure 3.1 Overlapping Blocs in Africa 76 
Figure 3.2 Potential Gains from Additive Regionalism for Chile from Joining Additional RlAs 77 . 
Figure 4.1 Net Inflows of Foreign Direct Investment, Mexico, 1985-96 120 Figure 5.1 Equalizing Exchange: Trade Liberalization and Income 
Convergence,1947-81 128 
Figure 8.1 Average Prices of Brazil's Imports from Argentina Relative to Prices of Imports from the United States, 323 Commodities, 1990-96 
217 
Figure 8.2 Average Prices of U.S. Exports to Brazil Relative to Prices of U.S. Exports to the Rest of the World, 1,356 Cornrnodities, 1991-96 
218 
Figure 8.3 Average Prices Qf Exports from the Republic of Korea to Brazil Relative to Prices of Korea's Exports to the Rest of the World, 99 Commodities, 1990-96 219 
Figure 8.4 Domino Regionalism: Changes in Welfare as RlAs Form 232 

1ST OF TABLES 

Table 2.1 Sources ofWelfare Benefits in MERCOSUR's Imperfectly Competitive Sectors 52 
Table 2.2 Welfare Effect for Senegal of UEMOA and Unilateral Liberalization 
53 
Table 2A.1 Trade Effects of RIAs between Developing Countries, One Year before and Five Years after Implementation of Internal Preferences 59 

Table 3.1 Table 3.2 

Table 4.1 

Trade Share! Revenue 1m) and after CornrnUI1 Net Inflows 
121 
Tariff Equiv Tariff Avera 
Customs Estimates oj 
216 
Peru's CattL Pact 2 
Domino Re 
234 

Table 6.1 Table 8.1 

Table 8.2 

Table 8.3 

Table 8.4 

able 3.1 ¡lble 3.2 

Joining 

Table 4. 

Trade Shares, Selected RIAS 67 
Revenue Implications of a Free Trade Area: Customs Duties before and after Formation of the Southern African Development Community (SADC) 95 
Net Inflows of Foreign Direct Investment, MERCOSUR, 1991-98 121 
Tariff Equivalents of Restrictions on Services Trade 160 
Tariff Averages and Peaks in Selected Develpping Countries and Customs Unions 211 
Estimates of Potential Welfare Effects of Selected Asia-Pacific RIAS 216 , 
Peru's Cattle Imports before and after Formation of the Andean Pact 217 
Domino Regionalism: Strong, Intermediate, and No Expansion 

Tab T,,}, 

lO 

6, 
8. 

to Prices 990-96 

Table 8. 

8. 

able 8.4 

Brazil 
~ World, 

232 

CONTE