The New Regionalism: Trade Liberalization or Insurance?

48 Pages Posted: 25 May 2006 Last revised: 25 Aug 2010

See all articles by Carlo Perroni

Carlo Perroni

University of Warwick - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1994

Abstract

Several of the recently negotiated regional trade agreements (Canada-U.S., NAFTA, E.C.-Hungary/Poland/Czeck and Slovak Republics) contain significantly fewer concessions by the large countries to smaller countries than vice versa. Yet, it is small countries that have sought them and see themselves as the main beneficiaries. In this paper we attempt to resolve this seeming paradox by interpreting such agreements as insurance arrangements for smaller countries, which partially protect them against the consequences of a global trade war. What they offer to the large countries in return is largely non-trade benefits (such as restraints on domestic policies in the smaller countries, firmer intellectual property protection, firmer guarantees of royalty arrangements affecting resources on state-owned lands). When evaluated alongside the regional trade arrangements of the 1960s (such as the E.C.), these agreements may appear to produce little or no benefit relative to the status quo for smaller countries; but when evaluated relative to a post-retaliation tariff equilibrium, the value of these agreements to small countries is large because they help preserve existing access to larger foreign markets. There is little incentive for large countries to negotiate such arrangements without side payments of the non-trade variety, because these agreements constrain their ability to play strategically against smaller neighbouring countries (who are still important trade partners) in a trade war. Such regional agreements compared across constrained and unconstrained Nash outcomes will typically be welfare worsening for large countries, and side payments are needed for the

Suggested Citation

Perroni, Carlo and Whalley, John, The New Regionalism: Trade Liberalization or Insurance? (January 1994). NBER Working Paper No. w4626. Available at SSRN: https://ssrn.com/abstract=226956

Carlo Perroni (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
44 24 7652 8416 (Phone)
44 24 7652 3032 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

John Whalley

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
519-661-3509, ext. 83509 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for International Governance and Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
31
Abstract Views
1,059
PlumX Metrics