Regional Free-Trade Areas: Sorting out the Tangled Spaghetti

Abstract

As a result of the difficulties in negotiating the liberalization of trade globally, countries seek liberalization among smaller groups. We describe open regionalism as one such attempt to do this, and show why after a decade of success it ran into the ground as a strategy. The formation of discriminatory regional free-trade areas (FTAs) is sometimes seen as another response to this problem. This paper point outs what is wrong with this response - that it distorts trade patterns and thereby sets up an unpleasant prisoner's dilemma - and suggests some ways forward. We propose the formation of open trading arrangements (OTAs) and the establishment of a Trade Transparency Commission in each country that is participating in an OTA. We also suggest global regulation of trade diversions caused by all FTAs, whether OTAs or not. Ultimately, the return to health of the global trading system will require expanded understanding of the basic insight of economics, that liberalization enhances the welfare of citizens of the liberalizing country.