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Review of Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Arrangements.

Jagdish Bhagwati, Pravin Krishna and Arvind Panagariya (eds), Review of Trading Blocs: Alternative Approaches to Analyzing Preferential Trade Arrangements, MIT Press, 1999.

Formation of trading blocs and its implications toward the welfare of individual countries as well as that of the world economy is a burning issue today. A literature search on this topic yields a number of edited volumes in recent years -- including ones by some of the authors of this edited volume. Some emphasize theory more than the institutional aspects and some do the opposite. Confining to the former category, the present volume is by far the best -- coming out of the trio, each one of which has made significant to major contribution to the literature itself.

NAFTA has had a bandwagon effect on countries to think seriously about forming new trading trading blocs and expanding existing ones. The `null' thinking is that it is better for the participating countries and paves the way toward more liberalization globally; in other words, bilateralism or regionalism is a building bloc toward multilaterism. This volume presents a contrary view that bilateralism -- at least in its current form and scope -- is rather a stumbling bloc. Professor Bhagwati has been forcefully expounding this view for quite some time and in some sense this volume identifies itself as a well articulated, comprehensive culmination of that viewpoint.

In terms of its contents it is much broader in scope. Altogether, there are 28 papers/chapters plus the Introduction. And many of them are previously published work in reputed professional journals and by reputed specialists in the field of international trade. However, given the sheer number of chapters, it does not seem worthwhile to present a summary of each chapter for the reader. But the reader should know at the outset that the introductory chapter provides a very good overview of all the chapters to come, together with a grand synthesis. Furthermore, a very distinguishing feature of this collection is that it spans the entire history of thought -- so to speak -- on the subject starting with Jacob Viner's pioneering work in 1950. From the perspective of a graduate student who has just begun to learn the theory of trade policy, this is an all-in-one treasure box. For some one like me who have tried to learn trade theory and taught it for many years, any presentation of an issue with a historical background going back to at least the end of World War II offers a sense of completeness and delight. This relates not only to the cost-benefit analysis of preferential trading in general but also, in Bhagwati' s World Bank Conference Lecture (Chapter 1 in the volume), the American and British positions, and, shift of position over time, on the issue of regionalism versus multilateralism, which were decisive.

Let me be more specific now. One can begin with Chapter 4 of Viner's The Customs Union Issue (Chapter 3 in the volume) in which he explains the central concepts of free trade areas (FTAs) or customs union (CU), namely, trade creation and trade diversion. Various important extensions by authors like Richard Lipsey, Harry Johnson, Robert Mundell and W. Max Cordon bring us to early 70s. This is not to minimize James Meade's important work on customs union in the 50s. Brilliant as it is, it surely is difficult to digest Meade in a hot summer (especially Delhi) afternoon. Arvind Panagariya's essay (Chapter 7), titled "The Meade Model of Preferential Trading", offers Meade and more in a palatable way. Finally, the Vinerian analysis culminates in Chapter 2 by Bhagwati and Panagariya in which they consider how trade diversion becomes more important under increasing cost.

A one-line summary of Viner's conclusion may be that any CU may not welfare improving to some countries without hurting others. The literature jumps to a different plateau with the well-known Kemp-Wan paper (Chapter 9). It shows that with suitable adjustment of tariff towards external countries (assumed given in the Vinerian model) and internal redistribution among member countries, all members can be better off and no external nations worse off. The variation and improvement of this theme are dealt in Chapters 10-12. These, together with Chapters 13 to 15 (not so important, in my view, in the overall scheme of things) completes the "earlier" literature. Chapters 16-26 constitute the "new". It has three strands. One is the "dynamic time path" issue: whether bilateralism aids convergence to a multilateral liberalization outcome. The second one is the political-economy aspects of regional agreements and its implication toward bilateralism serving to help or hurt the cause of multilateralism. These two issues are addressed in the papers by Krugman, Grossman and Helpman, Deardorff and Stern, Baldwin, Levy, Krishna, Panagariya and Findlay, and Richardson. Third, Chapters 24-26 examine the consequence of different aspects of trading rules in GATT/WTO toward bilateralism and its relationship with multilateralism. The volume ends with two "policy papers" espousing two opposite viewpoints. Lawrence Summers holds that bilateralism does not seriously hamper the cause of multilateralism and hence should be encouraged. Bhagwati argues to the contrary.

The coverage of the volume is comprehensive, spanning most of the important results in the theory of PTA and CU. This should be very welcome by those not too familiar with the formal literature on this important issue: there is ample scope for learning the subject. However, one limitation of this volume is that the Vinerian literature is emphasized perhaps more than it should have been and one would have liked to see more of recent contributions on more recent issues.

Moreover, the volume is partly geared toward upholding Bhagwati's viewpoint. On one hand, this is the very purpose of this volume. Theoretical arguments generated to demonstrate that trade diversion losses can be much more pervasive than commonly thought are new and convincing. On the other hand, some of the arguments against this viewpoint that are accepted by the authors as valid are somewhat brushed aside rather unconvincingly. For example, it is recognized that in Chapter 2 that the revenue seeking argument undermines their hypothesis, but elsewhere, the welfare consequence of revenue seeking and DUP (directly unproductive) activities is a hallmark of Bhagwati's overall contribution toward the theory of international trade policy. Last but not least, the volume almost entirely focuses on different possible static gains and losses from bilateralism. Although there are not many papers available on dynamic gains, but some papers on the effect of trade on R&D for example, which may have some bearing on the PTA or CU issue, or, some initiating discussion by the authors would have been desirable.

All said and done, there is however no doubt that it is the best of the lot currently on theoretical approaches to PTAs and CUs.

Satya Das Indian Statistical Institute - Delhi Centre
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Title Annotation:Review
Author:Das, Satya
Publication:Comparative Economic Studies
Article Type:Book Review
Date:Dec 22, 1999
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