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Richard Baldwin and Caroline Freund
Smith’s certitude can be thought of as a set of “goodies” that can be used by one or both PTA parties to buy noneconomic benefits from its partners. Because the size of noneconomic benefits that can be “purchased” is linked to the richness of the goodies bag—that is, the margin of preferences—PTA members have an extra incentive to maintain high margins of preference by avoiding multilateral liberalization. The goodies-bag logic, however, extends to a far greater range of issues than the tariffs that are the focus of the preference-erosion stumbling block. In the case of a PTA between very large and very small nations—a case that is extremely common in the new century (e.g., the United States and Costa Rica; Japan and Singapore)—the large country’s interest in the PTA can hardly be thought to be preferential market access. The EU, for example, grants extensive preferences to its members’ former colonies by using the justification of international solidarity. In other words, the economic gains to the EU’s partners count as a plus inside the EU because they advance one of the EU’s noneconomic objectives— fostering development. Similarly, but more explicitly, the United States justifies many of its PTAs with small, poor nations on the basis of noneconomic objectives, typically, antidrug or antiterrorism policies. The earlier discussion illustrated how the desire to safeguard rents created by a PTA could make a nation reject global free trade when it would have embraced MFN free trade without the PTA. The goodies-bag stumbling block logic amplifies this mechanism by making both nations interested in each other’s export rents—the area corresponding to C1' in figure 6.1, with the link operating through the pursuit of noneconomic (in the narrow sense) objectives. Cherry picking. An entirely distinct mechanism is at work in the cherry-picking stumbling block.10 Assume that the trading environment is marked by both intraindustry trade in differentiated products and interindustry trade. In this world, trade liberalization will produce gains from trade because of the variety effect in the differentiated product sectors (as in Helpman-Krugman models) and because of comparative advantage effects. The comparative advantage gains, however, come bundled with politically difficult effects on domestic factor prices, which will be lower (e.g., lower wages).11 Now suppose that two large nations have similar factor endowments. If they form a trade bloc, they will win a large share of the variety gains that would come with global free trade, and because of their similarity, they will experience little pain from lower factor prices. Taking the trade bloc as the base case, the bloc members may find a move to global free trade unattractive. It would entail a good deal of pain in terms of factor prices
and only a modest amount of additional variety or comparative advantage gains. Depending on parameters, especially the political power of the sufferers, the gains may not be sufficient to make global free trade attractive to the bloc members. Building Block Logic Whereas many trade policy scholars, including Krugman (1991b) and Bhagwati (1991), worried that regionalism was a stumbling block to global free trade, others, such as Summers (1991) and Bergsten (1991), viewed regionalism as a largely benign or even constructive force in the world trade system. Here, we consider the economic logic of the assertion that PTAs can foster multilateral liberalization. There are four main arguments in the literature. We begin with the one that permeates the rationales used by countries that simultaneously pursue regional and multilateral liberalization: the notion that preferential liberalization creates a political-economy momentum that makes multilateral liberalization easier (and vice versa). Juggernaut. According to the juggernaut building block logic, liberalization begets liberalization. The logic comes in two parts that are most easily explained in the context of multilateral liberalization. When the GATT began in 1947, import duties were high worldwide, since they had been set without international coordination during the tariff wars named for the U.S. Smoot-Hawley Act. The tariffs balanced the supply of and demand for protection in the “political market” of each nation separately. The main demandeurs of import protection were import-competing firms and the workers they employed. Government was the supplier of protection, but concern for the country’s general economic well-being meant that the government would set the protection level below what was lobbied for by special interests (the supply of protection being not perfectly elastic). Starting from this situation of uncoordinated tariff setting, announcement of an MTN based on the principle of reciprocity alters the array of political forces inside each participating nation. The central point is reciprocity, which converts each nation’s exporters from bystanders in the tariff debate to antiprotectionists. For exporters, lobbying against domestic tariffs becomes a means of lowering foreign tariffs. Because the MTN rearranges the political-economy forces inside each nation, all governments find it politically optimal to choose tariff levels that are lower than the unilaterally optimal tariffs.12 This is the first part of the juggernaut theory.13 The logic is not new.