Economics project regionalism vs multilateralism m com part 1 sem 1

Regionalism vs. Multilateralism - Overview
Trade liberalization and climate change share common themes. They are both global
challenges calling for a global solution, which will require multilateral cooperation. Climate
change, associated with the international externality of GHG emissions, is the first case of a truly
global environmental problem and therefore can be thought of as a prototype trans-border global
threat.
From the establishment of the GATT in 1947, global free trade has been promoted
multilaterally through international trade negotiation rounds. The multilateral trading system
was legally institutionalized in 1994 at the conclusion the Uruguay Round when the Marrakech
Agreement established the World Trade Organization (WTO), the new pillar of global
governance in charge of pursuing global free trade.
Symmetrically, an ideal solution to global environmental issues would be a Multilateral
Environment Organization. However, as this is unlikely to become a reality in the near future we
must accept multilateral environmental agreements (MEAs) as the best forum for addressing
environmental issues. At the same time, regional trade agreements have become a preferred
forum in which to accelerate and deepen trade liberalization. As a consequence, it may be of
interest to analyze how the trade-environment link is addressed within the regional trade
dimension.
Important related questions are the following:
- Are RTA members more able to protect the environment locally rather than globally?
- Do regional trade agreements have a higher or a lower level of ambition for
environmental issues compare to the WTO?
- In what different ways do RTAs deal with environment and climate protection?

REGIONALISM VS. MULTILATERALISM
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Regionalism - Introduction
In international relations, Regionalism is the expression of a common sense of identity
and purpose combined with the creation and implementation of institutions that express a
particular identity and shape collective action within a geographical region.
Regionalism is one of the three constituents of the international commercial system -
along with multilateralism and unilateralism.
o The first coherent regional initiatives began in the 1950s and 1960, but they
accomplished little, except in Western Europe with the establishment of the European
Community.
o In the late 1980s, a new wave of political initiatives prompting regional
integration took place worldwide.
The European Union can be classified as a result of regionalism. The idea that lies behind
this increased regional identity is that as a region becomes more economically integrated, it will
necessarily become politically integrated as well.
The European example is especially valid in this light, as the European Union as a
political body grew out of more than 40 years of economic integration within Europe.
By definition, parties to a regional trade agreement (RTA) offer each other more
favourable treatment in trade matters than to the rest of the world (including WTO Members). As
you know, this is contrary to the most favoured nation principle. The number of RTAs involving
WTO Members has increased notably in the recent years. Free trade areas are more prevalent
than customs unions. The purpose of a customs union or a free trade area should be to facilitate
trade among the parties to the RTA and not to raise barriers to the trade with other WTO
Members.

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Regionalism - Definition
Joseph Nye defined an International Region
- As a limited number of states linked by a geographical relationship and by a
degree of mutual interdependence.
Also International Regionalism
- The formation of interstate associations or groupings on the basis of regions.
In simple word it means
- The theory or practice of regional rather than central systems of
administration or economic, cultural, or political affiliation.
Other authors, such as Ernst B. Haas, stressed the need to distinguish the notions of
regional cooperation, regional system, regional organization and regional integration and
regionalism.
Regionalism refers to any policy designed to reduce trade barriers between a subset of
countries regardless of whether those countries are actually contiguous or even close to each
other.

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Regionalism - History
The first coherent regionalism initiatives, however, took place during the 1950s and
1960s. During the late 1990s, however, a renewed interest in regionalism emerged and lead to
the rapid emergence of a global system of regions with political and economic parameters.
Origins
It is quite difficult to define when the history of regionalism begins, since there is no
single explanation that encompasses the origins and development of the regional idea. Criteria
such as the desire by states to "make the best of their regional environment" are regarded by
certain analysts as elusive; they prefer to consider the history of regionalism in terms of the rise
of modern institutions. If formal organization at the regional as opposed to the international level
is to be the yardstick for the onset of regionalism, it is difficult to place its origins much before
1945.
Before 1945
Advocacy of international regionalism was rare in the period between World War I and
World War II when the doctrine of collective security was dominant. With the notable exception
of the Inter-American System very few regional groupings existed before World War II. What
did emerge before World War II were a growing number of international public and private
associations, such as the General Postal Union and the International Law Association, which
were holding regular meetings and had their own secretariats.
1945-1980
By the end of the Second World War, then, regionalism had not still entered the
vocabulary of international relations. By the 1940s however, an increasing number of influential
people had already advocated "escape from a theoretical and ineffective universalism into
practical and workable regionalism". Because of the subsequent demands by states that had
already made heavy political investments in regional arrangements such as the Inter-American

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System, the Commonwealth and the Arab League, regionalism made its appearance even in the
finalized UN Charter.
European Initiatives
European regionalism took a concrete form during the late 1940s. The treaty establishing
the Benelux Customs Union was signed in 1944 by the governments in exile of Belgium,
Netherlands and Luxembourg in London, and entered into force in 1947. In 1952, Denmark,
Sweden, Iceland and Norway (Finland joined in 1955) established the Nordic Council, an inter
parliamentary organization with the goal to forge the regional Nordic co-operation. The Nordic
Council's statutes set out in the 1962 Helsinki Agreement, according to which the parties
undertake "to seek to preserve and further develop co-operation between our nations in the legal,
cultural and financial areas as well as in matters relating to transport and protection of the
environment".
In the 1951 Treaty of Paris, France, West Germany, Italy, Belgium, Luxembourg and the
Netherlands established the European Coal and Steel Community (ECSC) to pool the steel and
coal resources of its member-states. The same states established on March 25, 1957 by the
signing of the Treaty of Rome the European Atomic Energy Community and the European
Economic Community, most important of two European Communities.
New Challenges
The growing success of European regionalism in particular led scholars in the late 1950s
to what Ernst called "the new challenge of regionalism, the potentialities of the field for insights
into the process of community formation at the international level". By the late 1950s, "the
organization of the world's ninety-odd states into various systems of competing and overlapping
regional associations had been a fact of international relations for over ten years".
Regionalism had already given rise to a floodtide of literature critical of its development
or determined to justify it as a necessity for world security. Some critics were arguing that
economic unions and common markets distorted the logic of a universal division of labor, and
that regional military planning was made both impossible and obsolete.

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After the 1980s
Since the late 1980s globalization has changed the international economic environment
for regionalism. The renewed academic interest in regionalism, the emergence of new regional
formations and international trade agreements like the North American Free Trade Agreement
(NAFTA), and the development of a European Single Market demonstrate the upgraded
importance of a region-by-region basis political co-operation and economic competitiveness.
The African Union was launched on July 9, 2002 and a proposal for a North American
region was made in 2005 by the Council on Foreign Relations' Independent Task Force on the
Future of North America.
In Latin America, however the proposal to extend NAFTA into a Free Trade Area of the
Americas that would stretch from Alaska to Argentina was ultimately rejected in particular by
nations such as Venezuela, Ecuador and Bolivia. It has been superseded by the Union of South
American Nations (UNASUR) which was constituted in 2008.

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Advantages of Regionalism
1. More Practical and Feasible: everybody would agree that multilateral
agreements are the preferred instruments for liberalizing international trade. Such agreements
ensure a non-discriminatory approach, which provides political and economic benefits for all.
RTAs bring faster results than multilateral process. Countries are taking RTA route because such
agreements are often a more practical and feasible way to liberalize trade.
2. Promote Freer Trade: Regional agreements promotes free trade. Further
regionalism has contributed to both internal and international dynamics that enhance rather than
reduce the prospects of global liberalization.
3. Contribute to Multilateralism: They seem to be contradictory, but often
regional trade agreements ca actually support the WTO’s multilateral trading system. Regional
agreements have allowed groups of countries to negotiate rules and commitments that go beyond
what was possible at the time multilaterally. In turn, one of these rules have paved the way for
agreement in WTO.
4. Demonstration Effect: Regional initiatives can accustom officials,
governments and nation to liberalization process. Learning by Doing applies to trade
liberalization as well as to economic development itself.
5. Positive Political Effect: Trade and Boarder economic integration has brought
about peace between neighboring countries and thus has positive rather than negative political
effects. Trade and Boarder economic integration has created European Union in which another
war between Germany and France is literally impossible.
6. Compatibility: The supporters of regionalism note that Article 24 of the GATT,
and now the WTO, explicitly permits regional agreements and thus acknowledges their
compatibility with the multilateral trading system. The major regional agreements have been
largely justified in claiming their ‘full compatibility with the multilateral system.’

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Disadvantages of Regionalism
Trade Diversion: The regional agreements divert trade by creating preferential
treatment for member countries vis-a-vis non-members. In addition to differential tariffs,
members may benefit from preferential rules of origin and regional content requirements.
1. Undermine the Multilateral System: Countries may lose interest in the
multilateral system when they engage actively in regional initiatives. The slow pace of
multilateral negotiates has given a greater importance to bilateral and regional trade negotiations.
2. Geopolitical Impact: Extensive and intensive regional ties may lead to conflicts
that range beyond economics to broader shares of international relations.
3. Prevents developing countries from active participation: The volume of
RTA activity stretches negotiation capacities to their limit, and in case of developing countries,
prevents them from actively participating in all proceedings. Furthermore, there is a fear that in
agreements formed outside the WTO, developing countries do not have the power of collective
bargaining to negotiate RTAs that are in their best interest.
4. Hurt the interest of others: Under some circumstances regional trading
system could hurt the trade interest of other countries. Normally, setting up a customs union or
free trade area would violate the WTO’s principle of equal treatment for all trading partners that
is “most-favored nation agreement”.

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Multilateralism – Introduction
In international relations, Multilateralism is multiple countries working in concert on a
given issue. Multilateralism is one of the three constituents of the international commercial
system - along with regionalism and unilateralism.
Multilateralism, whether in the form of membership in an alliance or in international
institutions, are necessary to bind the great power, discourage unilateralism, and give the small
powers a voice and voting opportunities that they would not otherwise have. Especially, if
control is sought by a small power over a great power, then the Lilliputian strategy of small
countries achieving control by collectively binding the great power is likely to be most effective.
Similarly, if control is sought by a great power over another great power, then
multilateral controls may be most useful. The great power could seek control through bilateral
ties, but this would be costly; it also would require bargaining and compromise with the other
great power.
Embedding the target state in a multilateral alliance reduces the costs borne by the power
seeking control, but it also offers the same binding benefits of the Lilliputian strategy.
Furthermore, if a small power seeks control over another small power, multilateralism may be
the only choice, because small powers rarely have the resources to exert control on their own.
International organizations, such as the United Nations (UN) and the World Trade
Organization are multilateral in nature. The main proponents of multilateralism have traditionally
been the middle powers such as Canada, Australia, Switzerland, the Benelux countries and the
Nordic countries.
Larger states often act unilaterally, while smaller ones may have little direct power in
international affairs aside from participation in the United Nations (by consolidating their UN
vote in a voting bloc with other nations, for example).
Multilateralism may involve several nations acting together as in the UN or may involve
regional or military alliances, pacts, or groupings such as NATO. As these multilateral

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institutions were not imposed on states but were created and accepted by them in order to
increase their ability to seek their own interests through the coordination of their policies, much
of these international institutions lack tools of enforcement while instead work as frameworks
that constrain opportunistic behavior and points for coordination by facilitating exchange of
information about the actual behavior of states with reference to the standards to which they have
consented.
Multilateralism is represented by the efforts on worldwide liberalization of international
relations, which started in the field of trade in goods when General Agreement on Tariffs and
Trade (GATT) was signed, and developed into broader fields of trade in services, investment,
agricultural products, public procurement, and intellectual property rights with its more
sophisticated successor – World Trade Organization (WTO).
The three types of changes (qualitative, quantitative and formal) are traditionally
designated to regionalism when New Regionalism is defined. Respecting the fact that also
multilateralism has gone through a profound change since late 1980’s it is more easily
understandable that its interaction with regionalism must be treated in another manner than
before.

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Multilateralism – Definition
Multilateralism was defined by Miles Kahler
- as international governance of the ‘many’
Its central principle was “opposition of bilateral discriminatory arrangements that
were believed to enhance the leverage of the powerful over the weak and to increase
international conflict.”
In 1990, Robert Keohane defined multilateralism
- As the practice of coordinating national policies in groups of three or more
states.
Recently the term "Regional Multilateralism" has been proposed suggesting that
"contemporary problems can be better solved at the regional rather than the bilateral or global
levels" and that bringing together the concept of regional integration with that of multilateralism
is necessary in today’s world.
The converse of multilateralism is unilateralism in terms of political philosophy.
Multilateralism is a characteristic of the world economy or world economic system.
It ultimately depends on the behavior of individual countries, that is, the extent to which they
behave in a multilateral fashion. For any one country, the multilateralism is a positive function
of:
 the degree to which discrimination is absent, that is proportion of trade partners
that receive identical treatment, and
 The extent to which the trading regime approximates free trade.
Global multilateralism is presently being challenged, particularly with respect to trade, by
emerging regional arrangements such as the European Union, NAFTA, etc.

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Multilateralism - History
One modern instance of multilateralism occurred in the nineteenth century in Europe
after the end of the Napoleonic Wars, where the great powers met to redraw the map of Europe
at the Congress of Vienna. The Concert of Europe, as it became known, was a group of great and
lesser powers that would meet to resolve issues peacefully. Conferences such as the Conference
of Berlin in 1884 helped reduce power conflicts during this period, and the 19th century was one
of Europe's most peaceful.
Industrial and colonial competition, combined with shifts in the balance of power after
the creation - by diplomacy and conquest - of Germany by Prussia meant cracks were appearing
in this system by the turn of the 20th century. The concert system was utterly destroyed by the
First World War. After that conflict, world leaders created the League of Nations in an attempt to
prevent a similar conflict. A number of international arms limitation treaties were also signed
such as the Kellogg-Briand Pact. But the League proved insufficient to prevent Japan's conquests
in Eastern Asia in the 1930s, escalating German aggression and, ultimately, the outbreak of the
Second World War in 1939.
Along with the political institutions of the UN the post-war years also saw the
development of other multilateral organizations such as the General Agreement on Tariffs and
Trade (GATT) (now the World Trade Organization), the World Bank (so-called 'Bretton Woods'
institutions) and the World Health Organization. The collective multilateral framework played
an important role in maintaining world peace in the Cold War. Moreover, United Nations
peacekeepers stationed around the world became one of the most visible symbols of
multilateralism in recent decades.
Today there are several multilateral institutions of varying scope and subject matter,
ranging from the International Telecommunications Union (ITU) to the World Intellectual
Property Organization (WIPO) and Organization for the Prohibition of Chemical Weapons
(OPCW). Many of these institutions were founded or are supported by the UN (United Nations).

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Advantages of Multilateralism
1. Cannot be dominated by the major players: in the multilateral process,
when the priorities are set, they cannot be dominated by the major players.
2. Best for liberalizing an economy: A free and fair multilateral trading system
serves best the interests of any liberalizing economy. Although there has been a huge
proliferation of bilateral/regional free trade agreements in recent years, no one questions primacy
of the multilateral trading system. Jagdish Bhagwati acknowledged multilateral freeing of trade
as Stumbling blocks instead of building blocks. The growing influence of developing countries
in the WTO, on the other hand, has been continuously trying to replace the mercantilist agenda
of industrialized countries with a developmental agenda.
3. Contributed to India’s Growth: India’s agreement with the multilateral
trading arrangements helped it to sustain the trade liberalization process which was started in
1991. The inclusion of agriculture in the WTO agreement helped India bring about some policy
changes even in agricultural sector, which had remained highly protected after the initial round
of reforms. India’s impressive economic growth record has been facilitated by the sharp rise in
importance of the external sector in the Indian economy.
4. Better Economic Performance: the protagonists of the trade liberalization
claim that open trade policies lead to better economic performances. Virtually all growth
miracles are associated with rapid expansion of trade rather than wholesale substitution of
imports by domestic production. Trade allows consumers to benefit from more efficient
production methods through an expansion in consumption and to avail a wider choice.
5. Other Advantages: Beyond the welfare gains achieved through the reduction of
tariffs ion manufacturing and agriculture, additional gains tend to accrue with the introduction of
scenarios that incorporate trade liberalization in the service sector, trade facilitation, etc.

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Disadvantages of Multilateralism
1. Slow down the process: The biggest disadvantage to multilateralism is that in
the process every country has the right to have their opinions taken into account, and they
usually take advantage of it. It can slow down things a lot.
2. Increased use of NTBs: Another increasing problem with the WTO is the
increasing Non-Tariff Barriers to restrict trade from developing countries. The term NTBs is not
defined under WTO but its usage and understanding broadly refers to any ‘border measure’ other
than a tariff, which acts as a barrier to trade. Some NTBs are expressly permitted in very limited
circumstances, when they are deemed necessary to protect health, safety, or sanitation or to
protect depletable natural resources.

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Challenges
Compared to unilateralism and bilateralism where only the country itself decides on
what to do or make decisions between two nations, Multilateralism is much more complex and
challenging. It involves a number of nations which makes reaching an agreement difficult. In
multilateralism, there may be no consensus; each nations have to dedicate to some degree, to
make the best outcome for all. The multilateral system has encountered mounting challenges
since the end of the Cold War.
The United States has become increasingly dominant on the world stage in terms of
military and economic power, which has led certain countries (such as Iran, China, and India) to
question the United Nations' multilateral relevance. Concurrently, a perception developed among
some internationalists, such as former UN Secretary General Kofi Annan, that the United States
is more inclined to act unilaterally in situations with international implications.
This trend began when the U.S. Senate, in October 1999, refused to ratify the
Comprehensive Test Ban Treaty, which President Bill Clinton had signed in September 1996.
Under President George W. Bush the United States rejected such multilateral agreements as the
Kyoto Protocol, the International Criminal Court, the Ottawa Treaty banning anti-personnel land
mines and a draft protocol to ensure compliance by States with the Biological Weapons
Convention. Also under the Bush administration, the United States withdrew from the Anti-
Ballistic Missile Treaty, which the Nixon administration and the Soviet Union had negotiated
and jointly signed in 1972.
In a direct challenge to the actions of the Bush administration, French president Jacques
Chirac directly challenged the way of unilateralism: "In an open world, no one can live in
isolation, no one can act alone in the name of all, and no one can accept the anarchy of a society
without rules." He then proceeded to tout the advantages of multilateralism. Furthermore, these
challenges presented by U.S could be explained more with the strong belief on bilateral alliances
as instruments of control.

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Global multilateralism is presently being challenged, particularly with respect to trade, by
emerging regional arrangements such as the European Union or NAFTA, not in themselves
incompatible with larger multilateral accords. More seriously, the original sponsor of post-war
multilateralism in economic regimes, the United States, has turned to unilateral action and
bilateral confrontation in trade and other negotiations as a result of frustration with the intricacies
of consensus-building in a multilateral forum.
As the most powerful member of the international community, the United States has the
least to lose from abandoning multilateralism; the weakest nations have the most to lose, but the
cost for all would be high.
 Multilateralism is the key, for it ensures the participation of all in the management
of world affairs. It is a guarantee of legitimacy and democracy, especially in matters regarding
the use of force or laying down universal norms.
 Multilateralism works: in Monterrey and Johannesburg it has allowed us to
overcome the clash of North and South and to set the scene for partnerships—with Africa
notably—bearing promise for the future.
Multilateralism is a concept for our time: for it alone allows us to apprehend
contemporary problems globally and in all their complexity.

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Climatic Challenges
Climate stability can be viewed as a global ‘public good’ which means that there are few
incentives for unilateral mitigation, because these can be frustrated by the opportunistic behavior
(free riding) of other actors who would benefit from having cleaner air at zero cost. Hence, in
order to be effective, climate change mitigation requires a global-cooperative solution. The
foundations of an international approach to climate change were laid down by the UN
Framework Convention on Climate Change in 1994. However, while the entry into force of the
international climate agreement, the Kyoto Protocol, is still uncertain, different local climate
approaches have now emerged. Whereas the EU is sticking to the Kyoto commitment
irrespective of its ratification, the US is looking for more long-term strategies.
Since regionalism has proved to be more far-reaching in its coverage of domestic
measures and environmental regulations, might it also represent a reasonable opportunity for
strengthening the credibility of controversial climate-related measures? Indeed, as greenhouse
gas emissions (GHGs) relate to almost all human-economic activities, climate measures are
likely to have trade effects. This is the case, for example, in energy efficiency standards based on
processes and methods of production (PPMs) and of eco-labeling schemes which are likely to be
questioned as disguised barriers to trade that discriminate against “like products”.
Yet, trade frictions may be reduced by establishing international common measures and
methodologies; to this end cooperation within the Kyoto framework in defining this kind of
measure could reduce the scope of conflict within the multilateral trading system. However, as
the Kyoto Protocol has yet to come into force RTAs, by requiring regional harmonization for
example in product standards and technical regulations, can represent a ‘second best’ way to
attain the same outcome.

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Global Issues
The trade liberalization and climate change share the common characteristic of being
global issues: in both cases, the first best solution would be a multilateral agreement. However
both international trade and climate negotiations are progressing slowly. The increasing tensions
within multilateralism have been illustrated by the breakdown of the WTO Ministerial Meeting
Seattle in 1999, by the failure in Cancun in 2003, by the withdrawal of US from the Kyoto
Protocol and by the uncertainties surrounding the debate over the post-Kyoto architecture.
Paradoxically, it might be more realistic to aim for worldwide cooperation in a sequential
way rather than in a large multilateral step. As regards trade liberalization, it is broadly accepted
that regionalism is complementary to multilateralism and that it could suggest to the WTO how
to deal with the controversial new issues such as investment, governmental procurement and
regulatory measures on which it has limited experience. Since regional negotiations are easier
and faster to conclude, the cooperative attitude on trade might even spillover to the
environmental domain.
Moreover, now that trade talks are going deeper, regional trade negotiations offer an
opportunity to develop a more cooperative culture especially in the more sensitive issues where
countries have often been more reluctant to make concessions due to fears of a reduced ability to
protect their domestic preferences. Environmental cooperation could also come about as a side-
effect of regulatory harmonization.
On the one hand, there is a risk of ‘regulatory regionalism’ of having several RTAs with
heterogeneous regulatory systems: environmental concerns are deeply shaped by domestic
preferences and thus RTAs might be seen as a ‘fortress’ in which to better protect local interests.
On the other hand, regulatory harmonization and convergence is occurring not only within RTAs
themselves but also across different regional blocks.
By enhancing the opportunities for using environmental measures, regional trade
agreements might be a more promising channel through which trade policies could have a
positive impact on difficult topics such as climate change.

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RTA and the environment
As regional integration has become extremely topical in the past decade, the focus of our
research topic is the extent to which increasing regional integration will amplify or undermine
the multilateral agenda with respect to environmental provisions.
Most RTAs follow the language of WTO rules, recognising the same broad principles
and exemption clauses as the GATT. Many contain language in their preambles recognising the
need for environmental protection and the achievement of sustainable development objectives.
However, they differ significantly in the institutional structure through which these principles are
administered. Whereas in the WTO, provisions for environmental measures are integrated into
the various agreements and addressed in Committees, in a number of RTAs the environment is
also the subject of separate agreements on environmental co-operation. In addition, several RTAs
that did not initially contain specific provisions on the environment have since created separate
protocols or instruments to deal with the environment in general, or with specific environmental
problems.
The degree of harmonization arrived at varies, depending on the general motives
underlying a given regional integration project, from trade facilitation to economic integration
(Boas, 1999; OECD, 2003). RTAs can be broadly grouped into three ‘ideal types’ according to
their scope and institutional characteristics along a continuum of vertical integration (see Figure
1) running from a pure trade motivation such as in APEC and ASEAN to a full incorporation of
trade with environmental standards such as in the EU.
In addition to the process of vertical integration within regions, RTAs are increasingly
linked with each other, bringing about a parallel process of horizontal interaction (see Figure 1)
across regions. As inter-block agreements are built on the previous integration experience of
each RTA, they are likely to be wider in coverage and depth. Since they deal with new issues on
which the WTO is lacking in experience, the main contribution they can bring to the multilateral
regime is to provide a blueprint of how to address non-tariff barriers to trade.

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Inter-block agreements, by linking different RTAs, have the chance to bring about a
process of regulatory convergence across different blocks. By encouraging the adoption of
common standards that in the long run might become international standards, bilateral
agreements may even pave the way for global agreement on environmental regulations. Since
regulatory policies are important environmental policies, harmonization can bring about a
positive contribution in terms of environmental protection. It is much easier to accept a measure
which responds to criteria agreed regionally, rather than reflecting specific national provisions.
In the next section we review vertical integration along three main types of RTAs (trade
facilitation for a, free trade areas and customs unions, economic union, see also Table 4.1) and
the process of horizontal interaction, giving some examples.
Figure 1 Vertical integration versus horizontal interaction
Vertical integration within RTAs Horizontal interaction across RTAs
APEC
ASEAN EU-RUSSIA EU-CANADA CANADA-CHILE EU-MERCORSUR
MERCORSUR
NAFTA

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Trading Blocks: the continuum from APEC to the EU
Trade facilitation fora (e.g., ASEAN, APEC):
Trade facilitating RTAs such as APEC and ASEAN started as trade initiatives aimed at
enhancing regional political stability and economic prosperity of their members. APEC cannot
be strictly considered a trading block and its integration process is based on the concept of open
regionalism. Although environmental protection was not a priority when APEC was originally
established, sustainable growth has become a goal, at least in principle, and to some degree
APEC has shown an interest in promoting the compatibility between trade and environmental
policies.
Being particularly concerned with economic growth, ASEAN founded its policies on the
principle of ‘grow now, clean up later’. Concerns for the environment emerged gradually and in
1994 ASEAN launched the Strategic Plan of Action on the Environment. In 2002 this was
followed by the ASEAN Co-operation Plan on Transboundary Pollution. Although not explicitly
targeted at responding to climate change, it can be expected to have positive implication also in
terms of GHGs reduce.
Compliance monitoring does not rely on binding rules and environmental cooperation is
coordinated by three working groups on the environment. Yet, one of the first goals of the Plan is
to enhance its Institutional capacity in order to strengthen the environmental enforcement
mechanism.
ASEAN seems to be more EU-minded rather than NAFTA-minded since it has
aspirations to harmonize different environmental policies and standards and it is in favour of
undertaking joint actions. The ASEAN Plan seems to have overcome the original reluctance
towards trade-environment links expressing at least the intention of coordinating trade and
environmental policies: for example, recognizing the value of studying the environmental
implications of AFTA.

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Free-trade areas and customs unions with separate agreements on environmental co-
operation (e.g. NAFTA and Mercorsur):
The North American Free Trade Agreement between the US, Canada and Mexico entered
into force in 1994, just when the Uruguay Round was being completed. Therefore NAFTA
contains provisions similar to the GATT/WTO, although it is more far-reaching when dealing for
example with services, investment and environmental rules. A first commitment to promoting
sustainable development is included in the Preamble of NAFTA: to this end the need for
strengthening the development and the enforcement of environmental laws and regulations is
explicitly recognized. The monitoring and implementation of environmental regulations has then
been delegated to a specific side-protocol, the North American Agreement on Environmental Co-
operation (NAAEC).
NAFTA members have agreed on a sophisticated institutional set-up to ensure their
environment-related obligations are respected. NAAEC has created the Commission for
Environmental Cooperation (CEC) which, besides promoting environmental cooperation
between the three countries, is in charge of investigating cases of lax or non-compliance that may
ultimately be enforced through the use of trade sanctions. The CEC should also evaluate and
monitor the environmental effect of NAFTA and of the bilateral agreements of its members.
Although the NAAEC provides a unique institutional basis for effective, yet flexible
compliance control, it is not openly aimed at developing common regional environmental
regulations. Whereas the EU, Mercorsur (see below), and even ASEAN have required their
parties to coordinate environmental measures, the NAAEC does not: the CEC has to ensure their
enforcement, but each country remains free to choose the level of protection that best suits its
domestic preferences. However, a de facto process of upper harmonization towards US levels is
occurring.
NAAEC institutions and approaches are then replicated in the bilateral agreements of
NAFTA members, for example the bilateral Canada-Chile agreement and the bilateral Canada-
Costa Rica agreement.

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Mercorsur, the customs union between Argentina, Brazil, Paraguay and Uruguay was
established in the 1991 by the Tractado de Asuncion (Onestini, 1999) with the ultimate goal of
accelerating the social and economic development of its members and increasing their
participation in the world economy. This is to be achieved through deep integration along
European Union lines rather than the NAFTA model.
The reciprocity and the complexity between the trade and environmental policies are
openly acknowledged by the environmental agreement of Mercorsur. The Preamble recognizes
that trade and environmental policies must be complementary and not substitutes because trade
liberalization, if wisely managed, can be good for the environment. Moreover, environmental
policies have to be neither restrictive nor distorting for trade in goods and services.
Economic unions with integrated environmental dimension (i.e., European Union):
In the context of a more politically integrated entity, the EU offers the most
comprehensive coverage of the trade-environment linkage. In contrast to the WTO framework,
environment no longer has the status of an exception which must be positively argued for within
strict constraints, but is “a competing or co-equal policy in its own right”.
EU sustainable trade is an emblematic example of trade-environment integration. The
trade-environment link is addressed not only within environment policy, but all Community
policies should be integrated with the environmental dimension.
To conclude, can RTAs be said to contain environmental provisions that are more far-
reaching than those defined multilaterally by the WTO? As summarized in the Table 1, not only
have RTAs broadly covered the topic, but they have raised the status of environmental protection
from a mere exception, as is the case in the WTO, to a goal per se that deserves a specific
agreement or a protocol. All RTAs here analysed have institutionalized concerns for the
environment only as a secondary consideration: therefore it can be inferred that the cooperative
attitude on trade has enhanced the willingness to cooperate also on other items such as
environmental protection.

24
Table 1 Environmental provisions in trading blocks
DESCRIPTION ASEAN MERCORSUR NAFTA EU
DATE OF
ESTABLISHMENT
1967 1991 1994 1958
MEMBERS
Indonesia, Malaysia,
the Philippines,
Singapore, Thailand,
Brunei, Vietnam,
Laos, Myanmar,
Cambodia
Argentina,
Brazil,
Paraguay,
Uruguay
United State,
Canada, Mexico
Austria, Belgium,
Denmark, Finland,
France, Germany,
Greece, Ireland,
Italy, Luxemburg, +
15 new member
states
ENVIRONMENTAL
PROVISIONS
ASEAN Strategic Plan
of Action on The
Environment, 1994-
1998
Acuerdo Marco
sobre Medio
Ambiente, 2001
NAAEC North
American
Agreement on
Environmental
Cooperation, 1994
Art. 175 TEC, 1985
INSTITUTIONS
FOR THE
ENVIRONMENT
Three Working
Groups, one on MEAs
Environmental
Working Group
of the Common
Market Group
(SGT 6)
Commission for
Environmental
Cooperation –
Council, Secretariat,
Joint Public
Advisory
Committee.
The Council of
Ministers, the
European
Parliament, the
European
Commission, the
European Court of
Justice
CLIMATE
CHANGE POLICY
ASEAN Strategic Plan
of Action on
Transboundary
Pollution 2002
National
measures
National programs
The common and
co-ordinated climate
change polices +
national policies
UNFCCC
MEMBERSHIP
Indonesia, the
Philippines, Singapore,
Myanmar, Cambodia,
Malaysia, Thailand,
Vietnam, Laos
√ √ √
KYOTO
MEMBERSHIP
Malaysia, Thailand,
Vietnam, Laos,
Cambodia
√ Mexico, Canada √

25
Members' own trade policies
The evidence on whether the EU has led to higher or lower tariffs and non-tariff barriers
for member states' non-partner trade continues to defy simple conclusions.
Hufbauer (1990) argues that it created the conditions for France and Italy to contemplate
liberalization and that Germany would not have proceeded without its continental partners.
No-one would argue that the EU has set external tariffs above the levels that would
otherwise have ruled in at least one of its member countries, but this is quite different from
arguing that it has not raised protection in some countries and sectors--e.g., footwear in
Germany, agriculture in the United Kingdom, and textiles and clothing in Sweden. The trade-off
between the breadth and depth of protection is not well defined and so we cannot satisfactorily
rule on whether these examples constitute increases or decreases in multilateralism.
Other recent evidence on countries' own trade is equally mixed. Following NAFTA,
Canada reduced tariffs on 1,500 tariff items (mostly inputs) to help her industry compete with the
United States where tariffs were lower (WTO, 1995). This looks similar to Richardson's tariff
competition. On the other hand Mexico increased tariffs on 500 items-- see above. In Mercosur,
Argentina's tariffs on capital goods' imports will be raised to Brazilian levels. Going back further
in time, the 1960s RIAs in Latin America were inward-looking and frequently maintained and
even raised barriers against the RoW. The Central American Common Market, for example,
generated huge growth in intra-trade behind such barriers. In all probability the import-
substitution policy would have been less broad and/or foundered sooner if it had been restricted
to small countries operating on an MFN basis. Even further back, in the 1930s, one also finds
high external tariffs and burgeoning regionalism, but here the evidence is probably more
favorable to regionalism. Trade barriers were going up anyway and regional arrangements
probably served to reduce the coverage of the increases by exempting some flows.

26
Models of Tariff Regimes
1. Symmetric models
While the consistency of regional trading arrangements with the multilateral trading
system had attracted some debate previously and had, indeed, been modeled formally, the subject
took off with a seminal article by Paul Krugman (199 la).2 This considers a simple model of
integration and trade policy in which there are N identical countries and B identical blocs. Each
country produces one product; these are differentiated symmetrically from all others and all
consumers consume all goods; there are no transport costs, but each country levies a tariff on
imports from all non-partner countries.
When B=N each country is a bloc, but as B falls (with N/B taking integer values) the
countries within each bloc offer each other free market access and levy a common tariff on
Earlier contributions include. Within each country some products are available tariff-free--
domestic and partner supplies--while all others face an identical tariff, t. Tariffs are set to
maximize bloc welfare given the tariffs charged elsewhere in the world--a traditional Nash
optimum tariff game.
Krugman shows that as the number of blocs in the world decreases (that is, as integration
occurs) each bloc's share in the other blocs' consumption rises, conferring more market power on
each and raising the optimurn tariff. Integration creates trade diversion but in this model it is
exacerbated by raising the external tariff. Krugman (1993) shows that the effect of the latter on
economic welfare is relatively weak, however, and that even if it is suppressed his main
conclusion continues to hold. The latter is that the pessimism number of blocs in terms of
welfare is very small--three for most of his examples.
Krugman (1993) disaggregates the causes of the welfare losses from regionalism and
finds that they owe far more to trade diversion than to increases in the optimum tariff. That is,
the first-order impact of what countries do to themselves through regionalism matters more than
the second-order interactions between countries. This is a useful lesson when considering any
trade policy, but it is particularly salutary for our discussion, reminding us that multilateralism is

27
not the only dimension of relevance. According to the imperfect index developed above,
regionalism with a fixed external tariff may or may not harm multilateralism ceteris paribus --see
figure A. 1--but the act of raising the external tariff certainly does.
Krugman's work stimulated a storm of criticism and extension. The most pressing
theoretical criticism was that his production structure contained no element of comparative
advantage, and that this led him to over-emphasize trade diversion. Srinivasan (1993) offers one
counter-example and Deardorff and Stern (1994) another; the latter have equal numbers of two
kinds of country in the world and show that blocs containing equal numbers of each type realize
the full benefits of free trade regardless of their external trade policies. Thus the latter become
irrelevant.
A more sophisticated alternative is to be found in Bond and Syropoulos (1996a), who
introduce comparative advantage in an elegant way. Each country has an equal endowment of all
goods plus a supplementary amount (positive and negative) of one of them; the relative size of
the supplement and the regular endowment represents the degree of comparative advantage.
Working with a lower elasticity of substitution than Krugman, Bond and Syropoulos find that
optimum tariffs can fall as bloc size increases symmetrically. The world welfare-minimizing
number of blocs is two if comparative advantage comprises having more of one good than
others, but may be three or even higher if it comprises having less of only one. Thus the
Krugman result, and, indeed, the effect of regionalism on multilateralism, is obviously sensitive
to issues of comparative advantage.
Inter-continental regionalism (i.e., blocs between countries in different continents) is
always. They refer to their discussion as "Krugman vs. Krugman," my nomination for title of the
year. Deardorff and Stem (1994) effectively use the same approach but pairing countries by
complementary comparative advantage rather than transportation costs. Arguably, however, their
results gravitate away from continental blocs rather than towards them if comparative advantage
varies more across continents than within them.
Harmful for Frankel Stein and Wei, although as inter-continental costs rise it becomes
less so because it affects less and less trade. This result has also been challenged by Nitsch

28
(1996b) who gives examples with relatively low inter-continental transport costs in which
"unnatural" integration dominates "natural" integration! Frankel et al also consider preferential
trading areas which merely reduce rather than abolish tariffs between partners. Preferential areas
can always be constructed to be welfare improving--essentially because they ensure that the
optimal import-sourcing condition is not too badly violated. Similar arguments urround the
Kempa and Wan (1976)r result that a customs union can always and a common external tariff
that renders it welfare improving and thus that unions can beneficially expand and combine until
they arrive at global free trade. "Can," but there is no analysis of "do." This is not to criticize
Kemp and Wan; their focus was not on stepping stones.
2. Asymmetric models
A feature of all the results discussed so far is that regionalism is always symmetric in the
sense that as bloc size increases countries recombine into groups of equal size. This is a useful
simplification for asking what are the effects of having bloc size B1 in the world economy and
how such effects compare with those of having bloc size B2 in an otherwise identical world. But
there is no sense of evolution or expansion in such a static setup and this severely limits the light
they can shed on the issue of whether regionalism might lead to multilateralism. I turn now,
therefore, to models in which blocs grow endogenously and thus which at some stage are
asymmetric.
Nordstrom starts with a model very similar to that of Frankel and his collaborators—with
product differentiation and finite transport costs. He starts by considering just one bloc—a
customs union (CU). Its creation and expansion harm excluded countries even at constant
external tariffs; but in mitigation, these countries can always raise their welfare above free trade
levels by joining the bloc and "exploiting" further the remaining outsiders. As suggested by Goto
and Hamada and by Bond and Syropoulos, however, this process does not lead to the so-called
global coalition (all countries within the CU), because existing members will eventually lose
from further growth as the set of outsiders to exploit declines.
Nordstrom suggests that after about half the countries are inside the CU, further growth
will be vetoed from the inside. Nordstrom observes that if the CU chooses an optimum tariff

29
rather than a constant one, it will increase its tariff as it grows, hitting outsiders harder than in the
previous example. Then, in the absence of retaliation, the optimum size of the union is about
60% of the world economy. But, of course, the excluded countries might retaliate against such
aggression. If they alter their MFN tariffs so that they are punishing each other as well as the
The implication of all this for "regionalism vs. multilateralism" is ambiguous. The
assumed form of retaliation effectively transforms the excluded countries into a second CU,
albeit one with non-zero internal tariffs. This raises the possibility that the two blocs could gain
jointly from cooperation. However, in this model there is no identified way out of their prisoner's
dilemma: the issue is not addressed. The threat of retaliation if the union raises its tariffs does
nothing to prevent the creation of the union, it just limits its behavior once formed.
Nordstrom explores inter-bloc issues more formally by breaking his world into two
"continents"--A and B--and allowing blocs in each--very similar to the approach taken by
Frankel et al. Nordstrom finds that a CU on continent A hurts all excluded countries, but
impinges much more heavily on those in A, which are the CU's "natural" trading partners, than
on those in B. The incentives are for both sets of countries to seek integration; as previously, the
CU in A may close its doors, but nothing can stop a CU forming in B.

30
More about Regionalism Vs. Multilateralism
"Regionalism vs. multilateralism" switches the focus of research from the immediate
consequences of regionalism for the economic welfare of the integrating partners to the question
of whether it sets up forces which encourage or discourage evolution towards globally freer
trade. The answer is "we don't know yet." One can build models that suggest either conclusion
but to date these are sufficiently abstract that they should be viewed as parables rather than
sources of testable predictions.
Moreover, even if we had testable predictions we have very little evidence. Arguably the
European Union is the only RIA that is both big enough to affect the multilateral system and
long-enough lived to have currently observable consequences. The EU allows one convincingly
to reject the hypothesis that one act of regionalism necessarily leads to the collapse of the
multilateral system. But it is difficult to go further: the anti-monde to EU creation is unknown
and one does not know to what extent the EU is special.
Regrettably it seems to be as ambiguous as the theory, at least so far as issues of current
policy are concerned. Among current RIAs only the EU is large enough and long-lived enough to
have had identifiable consequences on the world trading system itself, and it is more or less
impossible to sort out what is generic and what specific among the lessons it teaches. Perhaps the
only unambiguous lesson is that the creation of one regional bloc does not necessarily lead to the
immediate break down of the trading system.
Several fundamental problems confront the scholar in this area. Foremost is creating an
anti-monde--how can we know what member countries' trade policy would have been in the
absence of the RIA? Second, systems evolve over long periods of time; it is not inconceivable
that while post-war RIAs have been liberal so far, they are sowing the seeds of destruction, for
example by reducing the number of independent middle-sized states which have an interest in
maintaining the world system. Third, as noted above, trade policy responds to shocks from other
areas: RIAs may be benign under one set of circumstances, but not another. How, then, do we
allocate responsibility over causes. Fourth, how do we define and measure multilateralism? Fifth,
the rhetoric required to achieve a political objective does not necessarily reflect actual causes.

31
Investment not Trade
Many commentators argue that the recent crop of North-South RIAs--e.g., NAFTA and
the Europe Agreements--have been aimed at locking in the southern partner's economic reforms
and stimulating inflows of foreign direct investment (FDI). Ethier (1996) offers a brilliant
formalization of these ideas. Briefly, developing countries start in autarchy, and as the world
grows and liberalizes they start to think about opening up themselves. If they reform successfully
and attract an inflow of FDI, they gain a step increase in productivity.
Their problem is that if several of them reform simultaneously, none can guarantee that it
will get the FDI--maybe the inflow will go to their rivals. Regionalism, by which an industrial
country offers particular developing country small preferences on its exports, overcomes this
problem by ensuring that the industrial country will invest in its partner developing country
rather than any other. (Since all industrial countries are assumed to be identical, as are all
developing countries, the smallest preference on return exports stemming from an FDI flow is
sufficient to create this link.) Thus regionalism ensures the success of reform, not only increasing
the proportion of reforming developing countries that succeed but also encouraging more to try.
This is regionalism as coordination--it removes a source of uncertainty and thus encourages
reform and openness.
Ethier's paper is original and important, but its model is very special. In particular, there
are no conceivable costs to regionalism to the partners. And, because countries are identical
within their type-class, no dangers of inefficient regional arrangements growing up within the
classes. Thus coordination comes essentially for free. Additionally, small changes to the model
would allow the same coordination to be achieved multilaterally. For example, if each
developing country considers coming out of the closet of autarchy at a unique time (because they
all differ slightly from one another in dimensions that affect the timing of their reform decision),
or if the supply of FDI for the industrial world is sufficiently large or the movements of factor
prices in developing countries sufficiently strong, every developing country can be sure of
getting some FDI if it opens up. Nonetheless the focus on FDI rather than trade is a powerful
attraction of this approach, given the structure of and rhetoric surrounding current North-South
regional arrangements.

32
Conclusions
The issue of "regionalism vs. multilateralism" is new analytically and deficient of
empirical evidence. It is hardly surprising, therefore that this survey should conclude with more
statements about research strategy than about the world we live in. Indeed, the only categorical
statement that can be made in the last class is that one incident of regionalism is not sufficient to
undermine a relatively multilateral system immediately.
A motivation for this study has been to assess the implications of any shift away from
multilateral to regional trade agreements for the trade/environment interface. The recent failure
at Cancun has raised fears that ‘competitive liberalization’ might undermine progress at the
multilateral level. The world trade system can be thought of as a four-wheeled vehicle, in which
the multilateral route represents one wheel, the regional and sub-regional route represents
another while the unilateral and bilateral routes represent the other two. Essentially, in this
vision the vehicle performs best when all four wheels are driving forward together, while
progress can probably still be made when one wheel is out of action.
This is particularly true now that the trade agenda has deepened so as to include domestic
regulatory measures on which the WTO has a limited experience and on which global
cooperation is much more difficult than it was for tariff reduction. Rather, RTAs seem to be a
‘better’ forum in which to address these measures, enhancing the chances for more progressive
environmental trade-related measures.
Going back to the questions mentioned at the outset, the evidence on RTAs provided here
allows us to conclude that RTAs do seem to amplify the multilateral environmental agenda. First
of all RTA members seem to be more able ensure environmental protection and in most cases
have shown a higher degree of attention to environmental issues compared to the WTO.
In particular in three clear areas RTAs have actually gone beyond the multilateral trading
system in the sense of including provisions preventing the relaxation of domestic environmental
laws and the enforcement of those laws; in defining the relationship between multilateral

33
environmental agreements and the RTA; and in requiring each party to periodically prepare and
make publicly available a report on the state of its environment.
As regards different ways of addressing environmental protection, individual trading
blocs such as ASEAN, Mercorsur and the EU have gradually extended regional cooperation from
trade towards to the environment by adding a side protocol or agreement dealing specifically
with environmental protection. Contrastingly, most inter-block agreements have encompassed
trade liberalization and environmental protection simultaneously, in the same agreement. Only
the Canada-Chile free trade area relies on a side agreement which was however established along
with the trade agreement, exactly following the NAFTA approach.
Main conclusions include:
* Models of negotiated trade policy also take a significant step towards realism.
However, it would be nice, in future, to try to move beyond the repeated game trigger strategies
approach to model a richer set of objectives and disciplines. This, of course, is a challenge not
only to researchers on regionalism, but also to those working on the trading system in general.
* Sector-specific lobbies are a danger if regionalism is permitted. Trade diversion is good
politics even if it is bad economics. I find quite convincing the view that multilateral liberalism
could stall because producers get most of what they seek from regional arrangements.
* The direct effect of regionalism on multilateralism is important, but possibly more so is
the indirect effect it has by changing the ways in which (groups of) countries interact and
respond to shocks in the world economy. The way in which the existence of fringes of small
partners affects relations between large players seems to a fruitful avenue, as does the structure
of post-integration institutions.
* The symmetric models looking at the welfare effects of regionalism have served their
purpose and probably offer rather little return to future research. Their structure is not plausible
and their results seems very fragile with respect to assumed parameter values. If completely new
ways of thinking about regionalism emerge, it may be worth exploring them in a symmetric

34
framework as a way of elucidating their properties, but this is not going to resolve the positive
"stepping stones" question.
* Asymmetric models are more plausible, but it is important to model both the demand
for and supply of bloc membership.
* It would be useful to embed the "regionalism vs. multilateralism" question in a
framework of general economic reform and/or economic growth to generate richer menus of
potential benefits and chains of causation.
* Regionalism, by allowing stronger internalization of the gains from trade de-restriction,
seems likely to be able to facilitate freer trade in highly restrictive circumstances or sectors.
The fear of ‘regulatory regionalism’ does not seem a real one and RTAs can reasonably
be expected to represent a ‘stepping stone’ towards multilateral agreements. Regulatory
cooperation is of increasing interest not only within individual RTAs, but the process of vertical
integration is paralleled by growing horizontal interactions across regions which in the long run
might lead to a convergence between different regulatory systems. In this process of promoting
regulatory cooperation, the EU is playing a leading role. How far the political stance of the EU in
promoting sustainable trade and regulatory harmonization will go is the real issue.
Regionalism versus multilateralism is growing as economists and political scientists
grapple with the question of whether regional integration arrangements are good or bad for the
multilateral System. Are regional integration arrangements are stepping stones toward
multilateralism? As economists worry about the ability of the World Trade Organization to
maintain the GATT’s unsteady yet distinct momentum toward liberalism, and as they
contemplate the emergence of world-scale regional integration arrangements (the EU, NAFTA,
FTAA, APEC, and, possibly, TAFTA), the question has never been more pressing.

35
Bibliography
1. Wikipedia
2. http://allspotinone.blogspot.in/
3. books.google.com
4. Manan Publication
5. Nber.org
6. venus.unive.it
7. britannica.com

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