Regional Integration and Incomplete Club Goods: A Trade Perspective

Abstract

Despite their popularity, regional organizations are decidedly controversial. As integrative agreements only between neighboring countries, regional organizations do not always create new trading opportunities. Instead, by lowering tariffs on goods flowing between member states, while at the same time retaining high tariffs against goods from third-party countries, they potentially substitute intra-bloc imports for what would otherwise be imports from outside the group. Because of such trade diversion, many commentators have characterized regional free trade as a "club good" - that is, as a special private benefit deriving value, in part, from the fact that nonparticipants are excluded.

This Article undertakes the first systematic examination of regional organizations as clubs in the legal literature and argues that although regional organizations exhibit some club-like dynamics they are at best incomplete forms of such cooperation. Two shortcomings are specifically identified. First, the Article shows that the legal architecture of trade agreements limits the degree to which many regional organizations are truly exclusive. As a result, regional organizations provide fewer benefits to members than classic economic clubs. Second, regional organizations are heterogeneous in ways other than those envisioned in the classic economic club literature. Specifically, members differ not in terms of the degree to which they prefer the club good - as is the theoretical conception of heterogeneity in the club goods literature - but instead in terms of their qualitative characteristics and competitiveness. Each member will thus not only incur different costs in joining a regional organization, but will also have a different point at which the preferential trading market will be congested with too many competitors. This heterogeneity further suggests that, all other political factors being equal, expansion of a regional organization's membership will be based not so much on the economic competitiveness of new members, but instead on the inefficiency of a prospective member state's domestic industries relative to those of each of the regional organization's members.