Globalizing Free Trade: The Ascent of Regionalism

C. Fred Bergsten

From Foreign Affairs, May/June 1996

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Summary:  Regional trade blocs, which account for 60 percent of world trade, have opened markets, but they cannot substitute for worldwide reciprocity. To prevent free trade from remaining their privilege alone, rich Northern countries should strike a bargain with poorer ones: low tariffs for greater market access. The grander the initiative, the greater the chance of success, particularly now that the United States is in danger of backsliding. Since export industries offer higher pay and more stable jobs, a firm date for free trade can solve America?s most pressing problem, stagnating wages and the attendant social ills.

C. Fred Bergsten is Director of the Institute for International Economics. Since 1991 he has chaired the Competitiveness Policy Council created by Congress and, from 1993 to 1995, the Eminent Persons Group that advised the Asia-Pacific Economic Cooperation forum.

Economic success in today’s world requires countries to liberalize to attract mobile international investment, which goes far to determine the distribution of global production, jobs, profits, and technology. Success also requires countries to compete effectively in international markets rather than simply at home. A process of competitive liberalization, therefore, has driven the trend toward free trade among a myriad of countries in all parts of the world with very different economic systems, at very different stages of development, and with very different prior philosophies.

Interstate arrangements are usually necessary to implement such liberalization, however, because domestic political opposition frequently blocks countries from abolishing their traditional barriers unilaterally. Entrenched interests fight hard, and often with prolonged success, to maintain their protected positions. Trade reform thus requires mobilizing enough pro-trade interests, especially exporters and others who would gain directly from the opening of markets abroad, to overcome those who resist further market opening. The political economy of trade liberalization in individual countries rests heavily on parallel liberalization in partner countries.

The most assured technique for achieving such parallel action is to insist on reciprocity, through the negotiation of trade agreements with enough existing or potential markets to tip the internal balance in favor of the desired liberalization. In seeking reciprocal liberalization, countries could turn either to their respective geographical regions or to the world trading system as a whole. The global approach is superior because it maximizes the number of foreign markets involved and avoids the economic distortions (and political risks) of discrimination among trading partners.

As the urgency of competitive liberalization has accelerated, however, the regional approach has increasingly come to the fore. It is considerably less complicated to work out mutually agreeable arrangements with a few neighbors than with the full membership of the well over 100 countries in the World Trade Organization (WTO). Moreover, regional groupings are demonstrably willing to proceed more boldly: many of them have decided to adopt totally free trade, whereas none of the global conclaves to date has even considered such an ambitious goal.

The desire to overcome traditional political rivalries has also driven several regional economic arrangements. The cardinal goal of the European Union (EU) was to end the historical hostility between France and Germany. Mercosur sought to end the arms race between Argentina and Brazil, including its nuclear dimension. A successful Asia-Pacific Economic Cooperation (APEC) forum would reduce the risk of intra-Asian and trans-Pacific conflicts, which have been so prevalent over the past century -- including three wars for the United States.

As a result, about 60 percent of world trade now takes place within free trade agreements or among countries that have decided to achieve free trade by a certain date. The EU has completed its ‘single internal market’ and in 1995 agreed with 12 Mediterranean countries (Euromed) to establish free trade by 2010. The 18 countries of APEC -- including the United States, Japan, and China -- have committed themselves to ‘free trade and investment in the region’ by 2010 ...

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