Regionalism and Multilateralism: A Political Economy Approach

Preferential trading arrangements are analyzed from the viewpoint of the “new political economy” that views trade policy as being determined by lobbying of concentrated interest groups. Two conclusions are reached: first, that trade-diverting preferential arrangements are more likely to be supported politically; and second, that such preferential arrangements could critically change domestic incentives so multilateral liberalization that is initially politically feasible could be rendered infeasible by a preferential arrangement. The larger the trade diversion resulting from the preferential arrangement, the more likely this will be the case.