RTAs Formation and Trade Policy

Abstract

From the mid-60s to the mid-80s there has been a gradual but fundamental change in the nature of trade protection. International trade has become increasingly restricted by quotas and other nontariff barriers, as the level of tariffs have fallen and governments have devised other forms of protection for sectors facing increased foreign competition. The paper shows such non-tariff barriers have very different effects and implications from tariff for the welfare outcome of a regional integration agreement. Indeed, binding quotas, differently from tariffs, succeed to preserve the trade volumes with the rest of the world, and lead to welfare improving customs unions and free trade areas since trade between the partners is not expanded at the expense of trade with the outside world. By relating the existence of welfare enhancing regional integration to the systematic change in the type of trade policy conducted by most countries, this paper emphasizes that the desirability of piecemeal reforms has increased through time and justifies a renewed and grown policy interest in preferential trade in the 90s, when NTBs had a greater weight in trade policies. This can contribute to explain the spurt of regionalism observed in the data.