Are regional pacts the future of world trade?

While the World Trade Organization (WTO) remains a central forum for many aspects of commerce (enumerated later), policy action on core trade liberalization—reduction of tariffs and other barriers—has clearly migrated from the WTO halls in Geneva to large regional pacts in various parts of the globe. As one example, in November 2025, the Commission for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—a major free trade agreement (FTA) between 12 primarily Pacific Rim nations[1]—identified Uruguay, the United Arab Emirates, the Philippines, and Indonesia as potential members—an expansion that would entail mutual reduction of trade barriers.

Nevertheless, regional FTAs are not the sole answer to the world's trade problems, whatever successes they may achieve in eliminating tariffs between members.

Concentration of world trade within regional groups

The proliferation of regional trade pacts invites an inquiry into whether world trade is increasingly concentrated within large regional groups. The logic of concentration is straightforward. Since the conclusion of the Uruguay Round of multilateral trade negotiations in 1995, barriers to intraregional trade have fallen much faster than barriers to extraregional trade. Between themselves, regional agreement members enjoyed the benefits of both Uruguay Round tariff concessions and freer trade with one another.[2] Other things being equal, accelerated liberalization within each regional agreement should foster faster growth of intraregional trade than extraregional trade.

Evidence from the literature

This straightforward hypothesis is a natural extension of numerous scholarly articles that investigate the impact of preferential trade agreements on bilateral trade between members. The literature was pioneered by Nobel Laureate Jan Tinbergen (1962) using a gravity model.[3] A more recent and widely cited article by Scott L. Baier and Jeffrey H. Bergstrand (2007) reinforces the common conclusion: preferential trade agreements create a significant amount of trade between partners. As Jacob Viner famously observed in 1950,[4] the pacts may divert trade from nonmembers, but most gravity models find that trade creation between members substantially exceeds trade diversion from nonmembers.

Measuring intraregional trade in major regional pacts

To investigate how the hypothesis of significant trade growth between preferential trade partners might apply to trade within large regional groups, this blog examines the merchandise trade flows since 1995 of six such pacts: the European Union (EU); the North American Free Trade Agreement (NAFTA), which has been supplanted since 2020 by the US-Mexico-Canada Agreement (USMCA); Mercosur (the agreement between Argentina, Bolivia, Brazil, Paraguay, and Uruguay)[5]; the Association of Southeast Asian Nations (ASEAN); the CPTPP; and the Regional Comprehensive Economic Partnership (RCEP), a pact between more than a dozen Asian and Asia-Pacific nations, including the major economies of China, Japan, and South Korea.

Although we characterize all these pacts as “regional agreements,” at its inception the CPTPP had both Asian and Western Hemisphere members (Canada, Mexico, Chile, and Peru) and expanded in 2024 to include the UK. In the future, the EU could establish a close connection, making the CPTPP a truly global pact.

For the most part, intraregional imports and total imports are calculated at ten-year intervals starting in 1995. The terminal year is 2024 since 2025 data are not generally available. While the CPTPP was established only in 2018 and the RCEP in 2020, import flows of the current members are calculated starting earlier. The reason is to establish a baseline for the magnitude of intraregional trade prior to the agreement. Calculations are reported even when data for a few smaller members of certain groups are missing (see appendix table 1). However, data for several members of ASEAN and RCEP are missing for 1995, and those calculations start in 2000.

The calculations reported here do not attempt to “hold other things equal,” in other words, to abstract from forces other than trade pacts that might affect the volume of intraregional trade. Consequently, the calculations could understate the impact of trade pacts if “other things” divert intraregional trade from the members, or they could overstate the impact if “other things” enhance intraregional trade.

With that caveat in mind, table 1 reports imports arriving from members of each region expressed as a share of total imports of the regional members. Judging by shares of intraregional imports in 2024, the EU and RCEP are the most comprehensive groups, with shares nearly half of total imports. At the other extreme are Mercosur and CPTPP, with intraregional imports accounting for less than a sixth of total imports.

But looking at changes over time, the surprising result is that, between 1995 (or alternatively 2000) and 2024, the only regional group that showed an increase (albeit small) in the share of intraregional imports as a share of total imports was RCEP.

The other five groups all showed declining intraregional imports expressed as shares of total imports over periods of 24 to 29 years. Even the RCEP intraregional share declined between 2015 and 2024, a period that covers the establishment of RCEP.

However, the CPTPP intraregional share increased slightly between 2015 and 2024, a period that covers its formation. And the NAFTA intraregional share increased between 1995 and 2000, a period that covers its first five years. Moreover, as Tinbergen found, the share of intra-European trade increased after the formation of the European Common Market.

Nevertheless, the time trend of intraregional trade shares indicates that other economic forces were stronger than the attraction of low tariffs in shaping import flows during recent decades. Probably most important was the rise of China as a source of quality manufactured goods at low prices. Expressed as a share of regional pact imports, data show the sharp rise in imports from China between 2000 and 2024: ASEAN 5.0 to 22.2 percent; CPTPP 6.7 to 17.6 percent; EU 3.0 to 10.1 percent; Mercosur 3.2 to 24.2 percent; and NAFTA 6.8 to 14.4 percent (see appendix table 2).

Accordingly, table 2 reports intraregional imports between members of each pact (except the China-centered RCEP region) expressed as a share of total imports of the region minus total imports by that region from China. Nevertheless, with the exception of ASEAN, the other regional groups still show flat or declining trends for intraregional imports.

Turning to policy implications, tables 1 and 2 convey a strong message about the role of the WTO, despite the political rise of regional pacts. Indeed, the scope for WTO leadership has actually expanded, as extraregional trade has remained constant or even grown as a share of total trade. In fact, according to WTO Director-General Ngozi Okonjo-Iweala, some 74 percent of world trade is still conducted under most-favored-nation terms.

Notable WTO achievements despite challenges

To be honest, the WTO fell on hard times after 2008 with the slow death of the Doha Round of multilateral trade negotiations. But since then, despite struggling with indifference or hostility from the US and even failing to reform its dispute settlement and consensus systems, the WTO has concluded noteworthy agreements on subjects not covered by regional pacts:

• The 2013 Trade Facilitation Agreement streamlining customs procedures.
• The 2015 decision at the Nairobi ministerial to ban agricultural export subsidies.
• The 2015 expansion of the Information Technology Agreement to eliminate tariffs on over 200 high-tech products, including medical equipment, GPS devices, and next-generation semiconductors.
• The 2017 entry into force of an amendment of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) to ease access to affordable medicines for developing countries.
• Conclusion of the Joint Statement on Services Domestic Regulation in December 2021 by over 60 WTO members, which entered into force in 2024 and is now binding for 55 members. 
• Agreement on the text for a plurilateral Joint Statement Initiative on  Electronic Commerce in July 2024, following negotiations by 91 WTO members; it is not yet in effect.
• The 2024 Investment Facilitation for Development Agreement among participating WTO members to improve the regulatory environment for investment; it is not yet in effect.
• The Agreement on Fisheries Subsidies, which entered into force in 2025, prohibiting subsidies for illegal, unreported, and unregulated fishing, fishing of overfished stocks, and fishing on the high seas.

It would be a mistake to rely solely on regional trade pacts, no matter how successful they may be in eliminating tariffs between members, to reduce trade barriers between regional groups, or to address numerous other subjects that arise in world commerce. The EU has already shown its prowess in rulemaking, and in time the CPTPP and other large regional pacts may do likewise. But for now, the WTO remains the central forum for commercial issues not yet addressed by regional groups and for reducing barriers between them.

Appendix

Notes

1. The CPTPP members are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the UK, and Vietnam.

2. In some cases, the formation of regional groups entails only modest reduction in tariff barriers because the members already had low tariffs. In other cases, the benefit of lower regional tariffs is undercut by onerous “rules of origin” that are difficult to meet. Both factors erode the potential for trade creation within regional groups.

3. Jan Tinbergen, Shaping the World Economy: Suggestions for an International Economic Policy (New York: The Twentieth Century Fund, 1962). The basic gravity model of trade between two countries postulates that trade will be larger if the two countries have bigger economic sizes and if they are geographically close to each other. Other variables in the model take into account features such as preferential trade agreements, common language, similar legal systems, etc.

4. Jacob Viner, The Customs Union Issue (New York: Carnegie Endowment for International Peace, 1950).

5. Bolivia became a full member in 2024 and was therefore not included in the calculations for table 1.