Regional Trade Blocs: A Boon Or A Burden?

To push ahead with efforts to reduce tariffs and liberalize trade on a global basis through the General Agreement on Tariffs & Trade or to stress the establishment of regional trading blocs such as a North American free-trade area? That's the quandary facing U.S. trade policy, as it confronts a world in which multilateral trade progress is stalled and regional trading blocs are growing. It was also the key issue debated by economists at a two-day symposium in Jackson Hole, Wyo., sponsored by the Federal Reserve Bank of Kansas City in late August.

At the meetings, attended by 100 economists and central bankers, Paul Krugman of Massachusetts Institute of Technology argued that the move toward regional free-trade areas should be applauded. Further progress toward lower trade barriers, he believes, has been blocked by the emergence of powers such as Japan, whose institutional character seems to violate traditional free-trade rules, and by the waning influence of the most powerful free-trade advocate, the U.S. Thus, he says, regional trade pacts may even be seen "as a godsend to world trade," offering a way for trade to increase while excluding nations with apparently incompatible trade practices such as Japan.

Lawrence H. Summers, chief economist at the World Bank, took strong exception to Krugman's Japan-bashing but agreed with him that most trading blocs simply reinforce already existing patterns. Noting that U.S. trade with Canada and Mexico was already many times greater than would be expected based on their respective gross national products, he argued that free-trade agreements among these countries tended to promote existing efficiencies.

C. Fred Bergsten, director of the Institute for International Economics, however, saw trading blocs as a potential threat not only to further progress toward liberalized trade that would allow all nations greater access to each other's markets but also to the progress already achieved. The solution to the problem posed by distrust of Japan, he argued, is not to institutionalize it by pushing trading blocs but to redouble efforts to foster global trade. "History teaches," he warned, "that failure to accommodate rising powers in a systemic structure is a sure recipe for serious conflict."

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