Open Regionalism versus Discriminatory Trading Agreements: Institutional and Empirical Analysis

This article explores two approaches to regional integration: traditional free trade areas and customs unions under Article XXIV of GATT and the new concept of open regionalism introduced by the Asia-Pacific Economic Co-operation (APEC). Once the main features of open regionalism are described, we analyse the feasible extension of this model to other regions. Special attention is paid to the traditional framework of Article XXIV and the alternative ways of making regional agreements more open. Finally, empirical evidence is provided for two ongoing projects of regional integration: Mercosur and the ASEAN Free Trade Area (AFTA). I. Introduction The principle of non-discrimination is a cornerstone of the General Agreement on Tariffs and Trade (GATT). In Article I, contracting parties are committed to grant Most Favoured Nation (MFN) treatment to all other GATT signatories, that is to extend to them all trade concessions without discrimination. Regional trade agreements are, by definition, discriminatory, since trade concessions are granted only to members. However, as an exception to Article I, Article XXIV allows for regional agreements under certain conditions on the grounds that international economic liberalization has been pursued by both multilateral and regional agreements. The insertion of these discriminatory agreements within the international trading system has been a major issue of discussion over the decades, ever since the signature of the GATT in 1947. In those early days of the postwar trading system, the United States and Great Britain disagreed on the compatibility of the British Imperial Preferences with the new provisions of the multilateral trading framework. In the present, concern arises again on the proliferation of regional trade arrangements in the 1980s and 1990s and on the possible weakening of the multilateral system embodied by the World Trade Organization (WTO): more than one hundred regional agreements so far have been notified to the GATT/WTO, twenty-nine of them recorded since 1992. Although some of them simply replace former regional agreements, for example EU for EC or AFTA for ASEAN, there is certainly a renewed impulse towards regional integration. The fear of a failure of the Uruguay Round negotiations boosted the search for liberalization at the regional level, with the United States, the former sponsor of multilateral trade, as the key player (Bhagwati 1987). The large trade deficits in the 1980s, along with the expected emergence of the EC as a fortress after the Single Act led to a major shift in American trade policy towards unilateralism and regionalism. Also the EU adopted a regionalist approach and developed throughout the last decade numerous forms of association and co-operation, which stand out as classical examples of hub-and-spokes agreements and threaten to proliferate in the future (for example FTAA and TAFTA initiatives). The concern over the expansion of such agreements and the creation of regional trading blocs relates to its impact on third countries outside the regional scheme. As the world moves towards larger trading blocs, with countries linked by tailor-made agreements, developing countries that did not implement or join any arrangement may be harmed (Hughes Hallett and Primo Braga 1994). Also, trade between blocs is likely to shrink (Krugman 1991), even though it can be offset by new intra-bloc flows. Regionalism may as well undermine the GATT system by diverting resources and political capital from the multilateral system (Lawrence 1996). All these concerns have been widely addressed in the economic literature, from the classical theory of customs unions by Viner (1953) to the new theory of regional integration, mainly concerned with the dynamics of integration and the incentives for single countries to join regional trade initiatives (for example Baldwin 1993). At the same time, a new concept in regional integration has recently emerged from the experience and proposals of the Asia-Pacific Economic Cooperation (APEC): open regionalism. …