OPERACIÓN DE LAS VARIABLES

In the present context and debate, theoretical research on regionalism versus multilateralism, according to Winters (1999, 11), “took off” with a 1991 seminal article by Krugman, Is Bilateralism Bad? To make the analysis of the problem of regionalism tractable,

Krugman (1991a, 9-23) employed a simple model in which there exists N identical countries and B

there is no transport cost to bring the good from one to another place. If B = N each country is a

bloc, but when B falls as regional integration occurs, each country within the bloc gives one

another free market access as well as imposes a common external tariffs on non-members. The external tariff rate is chosen so as to maximize the bloc’s welfare, taking the policies of other trading blocs as given – a traditional “Nash” optimum tariff game.

Krugman showed that as the number of blocs in the world decreases, each bloc’s share in the other blocs’ consumption rises, so the rate of optimum external tariff increases because the bloc commands more market power. Integration not only creates trade diversion but also in his model it is exacerbated by increasing external tariffs. In essence he showed that the world welfare is lower with a few trading blocs than the cases of only one or many blocs, and for specific parameter values, the world welfare is worst when the number of blocs is three.40

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 emphasis trade diversion. Srinivasan (1993, 84-89) offer one counter example when he considered a two-good-one-factor Ricardian model as an analogy to the two-province-one-factor model with continuum of goods. He demonstrated in this model that even with complete trade diversion, each province enjoys the same level of welfare as in global free trade, and concluded that once the symmetric assumption of trading blocs is dropped the Krugman’s result is no longer valid.

40 _{This finding raised the eyebrows of many economists and policy makers because at about the time of Krugman’s}

writing the world seemed to be moving towards the formation of three major trading blocs: Europe, North America and Asia. Specifically at this time the EC started an aggressive program for its enlargement; in North America the US was proposing for the establishment of NAFTA; and, in Asia the expectation was for Japan to lead the East Asia Economic Grouping, the formation of which was proposed by Malaysia (nevertheless, the original concept of this grouping never takes off due to lukewarm response from Japan and outright opposition from the US).

Alan Deardorff and Robert Stern (1994, 18) provided another counter example in which the finding is inconsistent with Krugman. They used different assumptions: trade in homogenous products occurs between countries which own the same technology but have different factor endowments as in Hecksher-Ohlin model. Deardorff and Stern imagined two types of countries, with a pair of countries of each type. When two blocs are formed, each combining a country of each type, all the benefits of a move to free trade are achieved at the two-bloc level. In a more general setting, with equal-probability drawing to form trading blocs, Deardorff and Stern showed that the world welfare increases monotonically as the number of blocs diminishes (with each bloc becoming larger). This finding is in contrast with Krugman’s U-shaped welfare contour depicting the relationship between the number of blocs and world welfare, in which the world welfare is minimized when the number of trading blocs is three.

Eric Bond and Constantinos Syropoulos (1996a, 411-437) introduced an elegant model to examine the relationship between the size of trading blocs and their market power under the existence of comparative advantage. They demonstrated that the effect of an increase in the size of trading blocs over Nash optimum tariffs is highly sensitive to the assumptions made regarding the pattern of endowment. When the share of importables in the bloc endowment is zero (as in Krugman) equilibrium tariffs must increase with an increase in absolute bloc size. In contrast, if the share of importables in the endowment is positive, this result only holds if the elasticity of substitution is sufficiently low. Otherwise, the equilibrium tariffs must decrease with increasing bloc size. They also showed that the world welfare is at minimum when the world has four or more blocs if the elasticity of substitution is low and the share of importables in the endowment bundle is small. If the share of importables in the endowment bundle is sufficiently high, world welfare will be minimized when there are only two trading blocs.

A significant extension to the Krugman’s original model is the incorporation of the role of transport costs. Krugman (1991b, 5-25) was the first to do this, although the issue was later thoroughly taken up by Jeffrey Frankel, Ernesto Stein and Shang-jin Wei in a series of papers. Krugman subdivided the world into continents and observed that if inter-continental trading cost was prohibitively high – thus precluding inter-continental trade – a series of regional blocs, each covering one continent, would produce a first-best outcome equivalent to global free trade. This finding is in contrast with Krugman’s earlier work; that now trading blocs are good. Krugman inferred that even without the formation of regional free trade areas or preferential trading arrangements of any sort, countries trade more with their neighbours than with countries from which they are far apart, in part because of transport costs. Krugman’s conclusion is that, to the extent that trade follows the “natural” lines dictated by proximity, the formation of regional trading blocs is good. Such natural blocs are contrasted with “unnatural blocs”, in which free trade agreements are formed between individual countries on different continents, which are less likely to be welfare-improving.

Frankel, Stein and Wei (1995, 61-95; 1996, chapter 4) and Frankel (1997) undertook research analysing the cases in between the two Krugman’s assumptions by allowing transport costs to be finite but non-zero. They found that, as inter-continental transportation and business costs increase relative to intra-continental ones, regionalism becomes a better policy in welfare terms. For a set of parameters – three continents each with two countries, import tariffs of 30 percent; and zero intra-continental trading cost – they found that if inter-continental cost was above 15 percent of the gross value of export, intra-continental regionalism is welfare-improving. However this result is not very robust. Volker Nitsch (1996b, 26) showed that if intra-continental cost is fixed at just 5 percent in the above case, it produces a different result: regional blocs are welfare-decreasing for all the chosen values of inter-continental costs. Inter-continental

regionalism is always harmful to the world welfare for the models employed by Frankel, Stein and Wei. This result was also challenged by Nitsch (1996a, 355-363) who provided examples of relatively low inter-continental transport costs in which cases “unnatural” integration could be better than “natural” integration.

Frankel, Stein and Wei (1995, 61-95; 1996, chapter 4) also considered PTAs which merely reduce rather than abolish tariffs between partners. In this study the model showed improvement in welfare, essentially because (the formation of) PTAs ensure that the optimal import-sourcing condition is not too badly violated. In this sense Frankel, Stein and Wei argued that a bloc formation is a stepping stone towards multilateral free trade. This argument was disputed by Winters (1999, 14) who claimed that since they did not provide specific mechanism through which the benign path could be followed or even encouraged, their argument does not seem to be a particularly powerful characterization. Winters further argued that merely referring to the partial welfare benefits resulted from a PTA is not sufficient, for one could “equally refer to the (greater) benefits of jumping straight to free trade”.