BUSI 464 Week 8 Research Paper: Final Example

Inside the Bloc: Regional Trade Agreements Around the World and the Road to Membership

Introduction

Few features of the world economy have grown as quickly as regional trade agreements. In 1990 there were a few dozen in force; today there are several hundred, and almost every country belongs to at least one, many to a dozen or more. Lynch (2010) describes the result as a spaghetti bowl of overlapping commitments. For a government, the agreements raise two practical questions: what membership would actually deliver, and what joining would demand. This paper answers both. Its answer is that a country gains the most from membership in an agreement that reaches deep into trade rules and that sets out its admission conditions plainly and keeps to them, since depth is what moves trade and firm conditions are what drive the reforms that give membership its value.

The paper proceeds in six steps. It first explains why agreements form and spread, then reviews the evidence on their effects. It next surveys how integration differs across the regions Lynch (2010) covers. The longest section sets the European Union's admission process beside that of the Pacific-wide CPTPP. The closing sections turn the evidence into advice for a government considering membership and reflect, from Scripture, on the promises such agreements contain.

Why Agreements Form and Spread

Governments sign trade agreements for reasons that are partly economic and partly political. The economic motive is market access: lower tariffs and fewer barriers in a partner's market open opportunities for exporters, while cheaper imports benefit consumers and firms that buy inputs. The political motives are just as strong. Mansfield and Milner (1999), reviewing the wave of agreements that followed the end of the Cold War, emphasized that domestic interest groups, strategic relations among states and the multilateral trading system all shape which agreements form and who joins them.

A further force explains the speed of the spread. When two countries sign an agreement, exporters in a third country lose ground in both markets, because their competitors now enter duty-free. Baldwin and Jaimovich (2012) measured this pressure and found that it helped predict which countries signed new agreements: governments responded to being left out. Agreements are therefore contagious, and each one makes the next more likely.

The multilateral system both permits and limits this spread. Members of the World Trade Organization are generally bound to treat all other members alike, but Article XXIV of the General Agreement on Tariffs and Trade allows free trade areas and customs unions as an exception, provided they eliminate duties on substantially all the trade among their members and do not raise barriers against outsiders overall. Developing countries have additional room under the so-called Enabling Clause. In practice the rules have been interpreted loosely, which is one reason the number of agreements has grown so quickly, but they still shape what agreements look like: a deal that covered only a few products would violate the exception, so members must commit to broad liberalization.

Economists distinguish two effects of an agreement. When an agreement lets a member buy from a partner what it once produced expensively at home, economists call the result trade creation. When it leads a member to buy from a partner what it once bought more cheaply from an outsider, only because the partner now pays no duty, they call it trade diversion. Surveying decades of studies, Freund and Ornelas (2010) found the second effect to be less common in practice than the first, and found little sign that regional deals had held back liberalization at the global level. That conclusion frames the rest of this paper: on balance, agreements are building blocks, but their value varies widely.

What Agreements Do

The central question for any government is whether an agreement raises trade. Early studies found small effects, but they faced a problem: countries that sign agreements are often natural trading partners, so comparing them with other pairs confuses cause with selection. Baier and Bergstrand (2007) solved the problem by following the same country pairs before and after they signed, and their estimates implied that two members' trade with each other about doubles within ten years of an agreement taking effect. That is a large effect, larger than most single policy changes a government can make.

The average hides wide variation. Kohl et al. (2016) estimated the effects of 296 agreements separately and found that many had little measurable effect while others had large ones. Agreements with deeper content, and especially with provisions that were legally enforceable, tended to raise trade more. Dür et al. (2014) built a dataset coding hundreds of agreements by their depth and showed that agreements have grown steadily deeper since the 1990s, adding rules on services, investment, intellectual property, public procurement and standards.

Depth, not the label on the agreement, is the best single guide to whether membership will change a country's trade. A free trade area that cuts tariffs but leaves customs procedures, standards and services untouched may produce little; one that addresses those barriers can change how a country's firms do business.

The form of integration matters too. A free trade area removes barriers among members while each keeps its own external tariff, which is why such agreements need rules of origin: without them, goods from outside would simply enter through the member with the lowest tariff. A customs union adds a common external tariff, which removes the need for origin rules among members but requires them to agree on trade policy toward everyone else. A common market adds the free movement of labor and capital, and an economic union adds shared institutions and policies. Each step deepens integration and raises the demands on members. The choice a country faces when it joins is therefore not simply whether to join, but how much of its policy-making it is prepared to share.

There is a practical side to depth as well. Preferences only matter if firms claim them, and claiming them means documenting where a product's content came from. Where those rules are complicated, or differ across a country's many agreements, smaller exporters often pay the normal tariff rather than bear the cost of documentation. Newer agreements have responded by adopting common rules across many members and allowing inputs from any member to count toward origin, which makes preferences easier to use and widens the benefits beyond large firms.

A Survey of the Regions

Lynch (2010) organizes the world's agreements by region, and the regions differ in ways that change what membership means.

In Africa, overlapping regional communities long divided the continent, with many countries belonging to two or three blocs whose rules conflicted. The African Continental Free Trade Area, signed by 54 of the African Union's 55 members and trading since 2021, aims to bring most of the continent into one market of well over a billion people, but its success depends on removing barriers at borders, not only on tariff schedules.

In the Americas, the North American Free Trade Agreement, replaced in 2020 by the United States-Mexico-Canada Agreement, integrated three economies through supply chains, especially in automobiles. Its successor tightened rules of origin and added labor provisions. South of it, Mercosur created a customs union among Argentina, Brazil, Paraguay and Uruguay, though frequent exceptions have limited its depth.

In Asia, integration was led by firms. Companies built production networks across the region before governments signed agreements, and the agreements that followed, from ASEAN's free trade area to the Regional Comprehensive Economic Partnership, largely confirmed and smoothed patterns already in place. The many overlapping agreements and their separate rules of origin kept many firms from claiming preferences until common rules arrived.

Europe offers the deepest integration in the world: a single market for goods, services, capital and people, governed by common institutions and law. Russia and the former Soviet republics have built the Eurasian Economic Union, a customs union dominated by its largest member. North Africa and the Middle East are covered by an Arab League free trade zone and by a six-member Gulf customs union, yet Arab states still buy and sell relatively little among themselves, held back by look-alike export baskets and by recurring political ruptures, although econometric work credits the Arab League's zone with a real, positive effect on its members' commerce (Abedini & Péridy, 2008). The Pacific Islands, small and remote, rely on agreements with each other and with Australia and New Zealand to overcome the costs of distance and small markets.

Several patterns cut across these regions. Agreements in Europe and North America were built by governments with strong institutions and large internal markets, and they reached deep into regulation. Agreements in Asia were pulled along by firms, and governments followed. Agreements in Africa and the Arab world have often been more ambitious in their texts than in their effects, because weak infrastructure, similar exports and political disputes limited what tariff cuts could achieve. In the Eurasian Economic Union, one dominant member shapes the bloc's direction, which raises questions about how far the smaller members' interests are protected. And for small island states, the most important gains come less from tariffs than from rules that ease the movement of workers and the delivery of services across great distances.

The survey supports the thesis. Where integration is deep, as in Europe, it reshapes economies; where it is shallow, as in much of the Arab world, the effects are modest.

Two Routes to Membership

Joining the European Union

Accession to the European Union is the most demanding entry process of any regional agreement. A country applies; the European Commission gives an opinion; the member states, acting unanimously, grant candidate status and later open negotiations. Negotiations are organized into more than thirty chapters covering the whole body of EU law, from competition policy to food safety and the judiciary, and each chapter is opened and closed only when the candidate has adopted and begun to enforce the relevant rules. When all chapters are closed, the candidate signs an accession treaty, which every existing member state and the European Parliament must approve. For the countries that joined in 2004, the process took roughly a decade. Poland's path is typical: it applied in 1994, opened negotiations in 1998, closed the last chapters at the end of 2002 and became a member in May 2004. In those years it rewrote much of its commercial, environmental and administrative law, built new regulatory agencies and retrained officials to apply rules written in Brussels.

Why would a country accept such demands? Schimmelfennig and Sedelmeier (2004) traced the Union's influence over candidates to the conditions it attached to entry. Rules were adopted when the Union spelled out exactly what it required, when governments believed membership would really follow and would be worth a great deal, and when complying did not threaten powerful interests at home. The process was not only an entry fee. It was a reform program, and much of membership's benefit came from the reforms it required.

The benefit has been substantial. Campos et al. (2019) built, for every new member, a weighted mix of comparable non-members that tracked its economy before entry, and the gap that opened afterward put the average gain in income per person at roughly 12 percent ten years on, though some members gained far more than others. The European route is long and demanding, but for those who complete it, it has paid.

Joining the CPTPP

The CPTPP, the successor to the original Trans-Pacific Partnership that eleven Pacific Rim economies brought into force at the end of 2018, follows a different model. Its accession process is rules-based and lighter. A country submits a request; the existing members decide by consensus whether to open an accession process; an accession working group then examines whether the applicant can meet the agreement's existing rules and negotiates its market-access offers on goods, services, investment and government procurement. The applicant must accept the agreement's rules largely as written rather than negotiate them, and the members approve the final terms by consensus.

The United Kingdom became the first country to complete this process. It applied in 2021, signed its accession in 2023 and joined in December 2024. Its accession took about three years, far less than EU accession, because the CPTPP asks a new member to accept trade rules, not to adopt a whole body of law administered by common institutions. Several other economies have applied since, and their applications show that the consensus rule gives each existing member a say over who joins. Applicants with close trading ties to some members but political disputes with others have found that a single objection can stall the process, which illustrates that even a rules-based accession is ultimately a political decision.

Other Routes

Not every country chooses between full union membership and a free trade area. Norway, Iceland and Liechtenstein participate in the European single market through the European Economic Area, accepting most EU market rules without full membership or a vote in making them. Turkey has a customs union with the European Union for industrial goods, which gives it a common external tariff but excludes agriculture and services. Joining an existing customs union such as Mercosur requires an applicant to adopt the bloc's common external tariff, which can mean raising some of its own tariffs. These intermediate arrangements show that membership is not a single decision but a range of choices, each trading some independence for some access.

Comparing the Routes

The two routes differ in depth and in demand. EU accession requires adopting common law across nearly every area of policy, accepting free movement of people and submitting to common institutions; the reward is a single market and, as the evidence shows, substantial growth. CPTPP accession requires meeting high-standard trade rules and opening markets, but leaves the new member's laws, borders and institutions largely its own. Both routes share the feature this paper's thesis emphasizes: clear, credible terms. An applicant knows what it must do, and existing members know what they will receive.

Lessons for a Country Considering Membership

Four lessons follow from the evidence. First, depth matters more than labels. A country should look past the name of an agreement to what it covers and whether its provisions can be enforced, because deeper agreements are the ones that change trade (Kohl et al., 2016).

Second, credible entry terms are an opportunity, not only a cost. The European experience shows that conditions tied to a credible reward can drive reforms that governments might otherwise postpone (Schimmelfennig & Sedelmeier, 2004), and those reforms account for much of membership's payoff.

Third, the costs of membership fall unevenly, and governments should plan for them. The country essays in this course showed how. In Mexico, export manufacturing under the North American agreement created jobs but also drew some teenagers out of school, while opening the corn market pressured small farmers. In Poland, European Union membership raised incomes but sent many workers abroad and divided families. Neither cost was a reason to stay out, but both called for domestic policies, such as education incentives, rural support and labor protections, that the agreements themselves did not provide.

Fourth, firms must be able to use what governments sign. Preferences that are too costly to claim, because of complicated or conflicting rules of origin, deliver little. A government preparing to join an agreement should train its exporters and customs brokers in the new rules, so that the agreement's benefits reach the businesses it was meant to help.

Scripture offers an early example of a trade agreement and a perspective on what makes one good. When Solomon prepared to build the temple, he made an agreement with Hiram, the Phoenician king: Hiram's servants would cut cedar and cypress in Lebanon and float it by sea, and Solomon would supply wheat and oil to Hiram's household year by year. The account records that there was peace between the two kings and that they made a treaty (English Standard Version Bible, 2001/2016, 1 Kings 5:8-12). The arrangement rested on each side supplying what the other lacked, and it was kept. Modern agreements are far more complex, but they rest on the same foundation. Psalm 15:4 counts among the righteous someone who keeps a costly promise without backing out, a standard that applies to nations as well as to people. A country that joins an agreement accepts obligations that will sometimes be costly, and its reliability in keeping them is part of what makes it a valued partner.

Conclusion

Regional trade agreements have spread because they offer real gains and because no country wants to be left outside while its neighbors sign. The evidence shows that they raise members' trade substantially on average, but that their effects depend heavily on depth. Regions integrate differently, from Europe's single market to Asia's supply-chain networks and the Arab world's shallow agreements. Joining an agreement can mean a decade of reform, as in the European Union, or a few years of negotiation over market access, as in the CPTPP. Whichever path a country takes, the evidence points the same way: the deeper the agreement and the firmer its admission terms, the larger the reward. For a country weighing membership, the best preparation is to treat the agreement's conditions as a reform program, to prepare its firms to use the new rules, and to join only commitments it intends to keep.

For businesses, the analysis has a practical message as well. A firm deciding where to locate production, which suppliers to use or which markets to enter should map the agreements its home country and its target markets belong to, check how their rules of origin treat its inputs, and watch which countries are negotiating to join. Membership changes are slow, but they reshape competitive positions for decades, as Mexican and Polish firms discovered after their countries joined.

This analysis has limits. Most of the evidence measures average effects across many agreements, and the CPTPP's accession process has only one completed case. As more countries join the Pacific agreement and as Africa's continental market develops, future research will be able to test whether lighter, rules-based accession delivers gains comparable to Europe's deeper route.

References

Abedini, J., & Péridy, N. (2008). The Greater Arab Free Trade Area (GAFTA): An estimation of its trade effects. Journal of Economic Integration, 23(4), 848-872. https://doi.org/10.11130/jei.2008.23.4.848

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

Campos, N. F., Coricelli, F., & Moretti, L. (2019). Institutional integration and economic growth in Europe. Journal of Monetary Economics, 103, 88-104. https://doi.org/10.1016/j.jmoneco.2018.08.001

Dür, A., Baccini, L., & Elsig, M. (2014). The design of international trade agreements: Introducing a new dataset. The Review of International Organizations, 9(3), 353-375. https://doi.org/10.1007/s11558-013-9179-8

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

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

Kohl, T., Brakman, S., & Garretsen, H. (2016). Do trade agreements stimulate international trade differently? Evidence from 296 trade agreements. The World Economy, 39(1), 97-131. https://doi.org/10.1111/twec.12272

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

Schimmelfennig, F., & Sedelmeier, U. (2004). Governance by conditionality: EU rule transfer to the candidate countries of Central and Eastern Europe. Journal of European Public Policy, 11(4), 661-679. https://doi.org/10.1080/1350176042000248089