General Issues and Regional Groups
Edited by Miroslav N. Jovanović
Chapter 3: Multilateral versus Regional Trading Arrangements: Substitutes or Complements?
Richard G. Lipsey and Murray G. Smith 1 INTRODUCTION In recent years, there has been much debate about the advantages and disadvantages of the proliferation of regional trading agreements (RTAs), both customs unions (CUs) and free trade agreements (FTAs). The key question that we ask in this chapter, whether multilateral and regional trade liberalisation initiatives are substitutes or complements, raises issues concerning both the economic and political economy effects of RTAs. As with most real-world policy issues, these are second-best issues in which context matters: the initial starting position and the subsequent evolutionary dynamics affect both the immediate economic balance of trade creation and trade diversion, and the longer-term political economy implications for the multilateral trading system (MTS) – a system that has developed over the 65 years since the launch of the Bretton Woods post-war trade and payments system. The economic advantages and disadvantages of RTAs are quite well known. However, some economists, Cooper and Massell (1965) in particular, have been sceptical about their benefits, arguing that any advantage that is conferred on a country by an RTA could be obtained much more easily by a unilateral reduction of its tariffs. Wonnacott and Wonnacott (this volume, ch. 7) refute this view by considering the gains to export industries that arise from RTAs but are not available from unilateral tariff reductions. We consider their analysis later in our chapter, explaining why this leads us to accept the traditional view that RTAs cannot be judged as being either beneficial or harmful in...
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