BUSI 464 Week 1 Discussion Board Forum 1 Example

Discussion Board Forum 1: Regional Trade Agreements in a Globalizing World

BUSI 464 International Market Integration and Trade Agreements, Discussion Board Forum 1 Thread and Replies

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The forum prompt and the classmates are composites; the textbook, the research and the Scripture cited are real.

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Lynch (2010) describes the modern world of trade agreements as a spaghetti bowl: hundreds of regional and bilateral agreements, many overlapping, each with its own tariff schedules and rules about which goods qualify. A country such as Mexico belongs to agreements with North America, the European Union, Japan and many Latin American partners at once. The central question is whether this tangle helps or hurts the larger goal of freer world trade. Economists frame it as a debate over whether regional agreements are building blocks toward global free trade or stumbling blocks that divide the world into blocs. The question matters because the World Trade Organization's rules allow regional agreements as an exception to the principle that every member must treat all other members equally, on the condition that the agreements cover substantially all trade among their members. If regional deals undermine the wider system, that exception has been a costly mistake; if they push the world toward freer trade, the exception has served its purpose.

I think the evidence leans toward building blocks, with real costs. First, agreements clearly increase trade among their members. Baier and Bergstrand (2007) addressed the problem that countries choosing to sign agreements may already trade heavily, and still estimated that a free trade agreement roughly doubles two members' trade after about ten years. That is a large effect, and much of it reflects new trade rather than trade simply moved from elsewhere.

Second, the main stumbling-block fear, that members would raise barriers against outsiders, has not generally come true. Estevadeordal et al. (2008) studied Latin American countries in the 1990s and found that cutting tariffs for regional partners tended to be followed by cutting tariffs on the same goods for outsiders, not raising them. Regional liberalization appears to have pulled external tariffs down with it rather than walling partners off from the world.

The cost is the bowl itself. Every agreement has rules of origin that decide how much of a product must be made inside the region to qualify, and a firm exporting to several partners may need to document different content shares for each. Large firms can afford trade lawyers; small exporters often pay the full tariff rather than prove they qualify. The tangle protects no one but burdens the firms least able to bear it. One partial remedy is cumulation, which lets a firm count inputs from several partner countries toward the origin requirement, and some newer agreements, such as the large Asia-Pacific deals, adopt common rules across many members for exactly this reason. Building blocks, in other words, still need to be fitted together.

Scripture's command to love one's neighbor (English Standard Version Bible, 2001/2016, Leviticus 19:18) appears in the same chapter as the call for just weights and measures. Trade agreements, at their best, are formal promises of fair dealing between neighbors. The task for policy is to keep those promises from becoming so complicated that only the powerful can use them.

Reply to Andrea

Andrea, you noticed that once a few countries in a region sign an agreement, their neighbors seem to rush to sign their own. Research suggests that the pattern you saw is real and has a name: the domino theory of regionalism.

Baldwin and Jaimovich (2012) examined agreements worldwide and found evidence that they are contagious. When a country's trading partners sign agreements with others, its own exporters face a disadvantage in those markets, so its government comes under pressure to sign agreements of its own, either joining the existing one or forming a rival. Mansfield and Milner (1999) similarly described the post-Cold War wave of regionalism as driven partly by countries reacting to agreements formed elsewhere. That helps explain why the spaghetti bowl grew so quickly in the 1990s and 2000s. The European Union's enlargement offers a clear example, since countries that stayed outside watched their exporters lose ground in neighboring markets and then applied for membership or signed association agreements of their own. It also suggests one hopeful reading of the bowl: if each agreement pushes outsiders to join, the regional deals may gradually knit together. The contagion also has a cost, since each new agreement written separately adds more strands to the bowl unless partners agree to merge their rules. Which region in your post do you think is most likely to see the next domino fall?

Reply to Kevin

Kevin, you worried that regional agreements cause trade diversion, a concern economists trace back to Jacob Viner's work on customs unions in 1950, and one that sits behind the cautious tone of the opening chapter in Lynch (2010). Diversion occurs when a member starts buying from a higher-cost partner instead of a lower-cost outsider simply because the partner's goods enter duty-free.

The evidence on diversion is mixed, which I think supports your caution without proving that agreements do more harm than good. Clausing (2001) studied the Canada-United States Free Trade Agreement and found that its tariff cuts mainly created new trade, with little evidence of diversion from other suppliers. Freund and Ornelas (2010) reviewed the research and concluded that trade diversion has been less common than feared overall, though it can matter for particular goods when external tariffs remain high. Low external tariffs are the best protection, because they shrink the advantage a partner gains from duty-free access. When a country's tariff on outsiders is only 2 or 3 percent, a partner's duty-free entry rarely outweighs a real cost difference, so buyers keep choosing the cheapest supplier. Where external tariffs stay high, as in some agricultural goods, diversion is much more likely, and that is where your concern seems strongest. Would you support a rule that members of an agreement must also lower their tariffs toward outsiders?

References

Baier, S. L., & Bergstrand, J. H. (2007). Do free trade agreements actually increase members' international trade? Journal of International Economics, 71(1), 72-95. https://doi.org/10.1016/j.jinteco.2006.02.005

Baldwin, R., & Jaimovich, D. (2012). Are free trade agreements contagious? Journal of International Economics, 88(1), 1-16. https://doi.org/10.1016/j.jinteco.2012.03.009

Clausing, K. A. (2001). Trade creation and trade diversion in the Canada-United States Free Trade Agreement. Canadian Journal of Economics, 34(3), 677-696. https://doi.org/10.1111/0008-4085.00094

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Estevadeordal, A., Freund, C., & Ornelas, E. (2008). Does regionalism affect trade liberalization toward nonmembers? The Quarterly Journal of Economics, 123(4), 1531-1575. https://doi.org/10.1162/qjec.2008.123.4.1531

Freund, C., & Ornelas, E. (2010). Regional trade agreements. Annual Review of Economics, 2, 139-166. https://doi.org/10.1146/annurev.economics.102308.124455

Lynch, D. A. (2010). Trade and globalization: An introduction to regional trade agreements. Rowman & Littlefield.

Mansfield, E. D., & Milner, H. V. (1999). The new wave of regionalism. International Organization, 53(3), 589-627. https://doi.org/10.1162/002081899551002