Regionalism and its effects on multilateralism

This dissertation consists of three essays on regionalism. The first two essays investigate whether Preferential Trading Arrangements (PTAs) have a tendency to merge or to expand their membership, and whether this tendency continues so as to eventually yield global free trade. The first essay uses a differentiated-good model to analytically decompose and study the effects of PTA expansion on the wage rate, terms of trade, national income, and welfare of both member and non-member countries. It shows, on the one hand, that an expansion of a regional grouping always unambiguously hurts those that are left out even if the bloc's external tariffs remain constant. On the other hand, the effects of a PTA expansion on a member country are positive for small PTA size but become negative when the membership size is large enough.; The second essay presents a political economy model in which the size and number of PTAs are endogenously determined. It shows that if blocs form sequentially, outsiders always want to join the existing bloc. At some point, however, the incentives of the member countries to accept new members decline to zero before all countries are admitted. It is also demonstrated that the possibility of formation of a second bloc leads the members of the original bloc to choose a group size larger than the one they would have chosen if only one bloc was allowed to form. If blocs form simultaneously and then merge to yield progressively larger blocs, the process still fails to converge to global free trade except when the external tariff happens to be very low. In general, regionalism can make previously feasible global free trade infeasible.; The third essay studies the effects of regional integration on the incentives of both members and non-members to undertake multilateral trade liberalization. Using a three-country political economy model with imperfect competition, it shows that regionalism does affect the incentives for multilateralism. In fact, discriminatory trade policies alter the balance of gains and losses that the member and non-member countries experience from multilateral liberalization. As the degree of preference within the PTA increases, the member countries' support for large multilateral tariff cuts declines and the excluded countries' support for small multilateral trade liberalization also declines. Hence, the magnitude of the maximum multilateral tariff cut that the insiders are willing to undertake decreases, while that of the minimum tariff cuts demanded by the outsiders increases.