Regional Trading Blocs in the World Economic System

The rapid growth of regional trading relationships in Europe, Asia, and Latin America has raised policy concerns about their impact on excluded countries and on the global trading system. Some observers worry that the multilateral system may be fracturing into discriminatory regional blocs. Others are hopeful that regional agreements will go beyond what was achieved in the Uruguay Round and instead become building blocks for further global liberalization and WTO rules in new areas.

Jeffrey Frankel shows through extensive empirical analysis that the new breed of preferential trade arrangements are indeed concentrating trade regionally. He then assesses whether regional blocs are "natural" or "supernatural"—that is, whether they enhance or reduce global welfare. He concludes that a move to complete liberalization within blocs, with no reduction in barriers between blocs, would push the trading system into the supernatural zone of an excessive degree of regionalization. More balanced patterns of liberalization, however, give favorable outcomes. He considers regionalism at two levels: both the formal trading arrangements that are already in effect, and the broader continent-sized groupings that are under discussion (the Americas, Europe, and the Asia Pacific). Frankel's study also assesses the political and economic dimensions of regionalization and its implications for world economic prospects and public policy. In conclusion, Frankel proposes several policy prescriptions for pursuing partial regional liberalization among blocs as a stepping stone toward global free trade.