A Conference on:

The Sequencing of Regional Economic Integration:

"Issues in the Breadth and Depth of Economic Integration in the Americas"

September 9-10, 2005
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Conference Papers
James Anderson - William B. Neenan S.J. Millennium Professor of Economics, Boston College
Economic Integration and Civilizing Commerce”
David Hume and Adam Smith proposed that the spread of commerce was civilizing. Their hypothesis is formally examined in this paper. The basic mechanism is one where the opportunity to trade induces traders in any one country to form institutions of contract enforcement for foreigners, but their optimal institution still allows scope for opportunism.

Regional integration can, in this model, induce endogenous changes in trade costs, either positive or negative. Endogenous trade cost changes are negative in a country if increases in trade lead to less scope for opportunism (commerce is civilizing). This occurs when the elasticity of supply of traders is sufficiently high. Two countries within a region will typically compete in their desirability as import destinations. Competition in institutions induces still better enforcement if enforcement strategies are strategic complements. Complementarity is obtained if the supply of trade is sufficiently elastic. The model provides a useful structure of endogenous enforcement and gives promise of explaining patterns of institutional development.
Richard Baldwin - Professor of International Economics, Graduate Institute of International Studies, Geneva, Switzerland
Title: “Sequencing and Depth of Regional Economic Integration: Lessons for the Americas from Europe”
The paper first reviews Europe’s experience with regional integration, stressing the political economy forces that have sped, slowed and guided the process. It argues that the geographic spread of economic integration in Europe is driven by a “Domino Theory” process by which each successive integration increases the pressure on non-participants to join the integration effort. On the depth of integration, the paper argues that the path of European integration – from completion of the customs union, to the Single Market programme, to the Maastricht Treaty and monetary union – was dictated by a political economy dynamo set in motion by the unique institutional features established by the 1957 Treaty of Rome. Consequently, the lessons for other regions must be considered with great care. The paper concludes by considering the lessons that the European experience provides for the Americas.
Eric Bond - Joe L. Roby Professor of Economics, Vanderbilt University
Title: “The Sequencing of Trade Liberalization in the Presence of Adjustment Costs”
Regional trade agreements differ substantially in the extent of coverage of the agreement. In addition to the issue of whether the agreement is to be a free trade area or a customs union, there is also the question of whether to allow factor mobility or to adopt a common currency. Some agreements, such as the European Union, have evolved over time to include a much deeper degree of cooperation between the member countries. The objective of this paper is to examine the conditions under which an agreement between countries should start small with cooperation on a limited set of issues, followed by subsequent expansion, as opposed to immediate cooperation on all issues. It will also allow examination of the order in which the issues should be added to the agreement.

This question is an extension of existing work on gradualism in trade agreements. I plan to depart from previous work by emphasizing an environment where countries have private information about their willingness to cooperate under the agreement (eg. the extent of political pressure that comes from the import competing sector). Deepening of integration over time can then result from learning about the characteristics of the trading partner.
Robert Devlin - Deputy Manager, Integration and Regional Programs Department, Inter-American Development Bank
Antoni Estevadeordal - Principal Trade Economist, Integration, Trade, and Hemispheric Issues Division, Inter-American Development Bank
Kati Suominen - Trade Specialist, Integration, Trade, and Hemispheric Issues Division, Inter-American Development Bank
Title: "Sequencing Regional Trade Integration and Cooperation Agreements"
Regional integration has long been seen as evolving in sequential steps. The most common conceptualization, stressed particularly in the economics literature and influenced by the EU's integration experience, is moving from shallow to deep economic integration, from free trade agreements to customs unions, and further to common markets and monetary unions. However, economic analysis has generally yet to move beyond the realm of trade (or economic) integration to explore other forms of regional cooperation. For its part, political science has explored a wider range of regional cooperation, in areas such as security, environment, political dialogue, etc. While the more recent studies have moved from asking whether states can cooperate to how they cooperate at a regional level, the literature on international (or regional) cooperation remains primarily theoretical; relying on relatively limited empirical evidence. In this paper we attempt, first, to connect these two streams of literature mending some theoretical and conceptual gaps in our understanding of regional integration and regional cooperation; and, second, to provide some empirical evidence regarding the sequencing of regional trade integration agreements and other forms of regional cooperation. Our empirical exercise uses a newly constructed worldwide dataset on bilateral and regional trade and cooperation agreements spanning more than a century. The paper will emphasize some policy implications for intra regional and inter regional cooperation in the Americas.
Antoni Estevadeordal - Principal Trade Economist, Integration, Trade, and Hemispheric Issues Division, Inter-American Development Bank
Caroline Freund - Senior Economist of the International Trade Team, Development Research Group, The World Bank
Emanuel Ornelas - Assistant Professor of Economics, University of Georgia
Title: "Does Regionalism Help or Hinder Multilateralism? An Empirical Evaluation"
The majority of countries are involved in both regional and multilateral trade liberalization initiatives. The main concern about the proliferation of regional agreements is that it will draw countries away from global integration into less optimal regional groups, and that some countries will be excluded altogether. Indeed, results from a large theoretical literature imply that these two processes will interact, and in particular, that regionalism can either help or hinder the multilateral process. We empirically examine the effects of regionalism on multilateralism, using industry-level data on tariffs and bilateral preferences for eleven Latin American countries from 1989-2001. This unique data set allows us to examine whether products where preferences loom large are more or less likely to be liberalized. Our results imply that, in general, regionalism helps the multilateral process. The greater the preferences a country gives to its partners, the more the country tends to reduce its multilateral (MFN) tariffs. While there is no evidence that regionalism hinders multilateralism, we do find evidence that customs unions have a significantly smaller effect on multilateral tariffs than free trade areas. This is consistent with theoretical results showing that because countries in a customs union choose external tariffs jointly, as opposed to at the individual country level, their optimal tariffs are relatively higher. Overall, our results imply that concerns about a negative effect of regionalism on the multilateral system are overblown.
Simon J. Evenett - Professor, University of St. Gallen; Nonresident Senior Fellow, The Brookings Institution
Title: “Competitive Liberalization: A Tournament-Theory-Based Interpretation”
Three prominent features of the current U.S. trade policy of "competitive liberalization" are stimulating a competition among trading partners for access to U.S. markets; the inclusion of provisions in trade agreements not directly related to market access; and a greater role for foreign and security policy in U.S. trade policymaking than in the past.  This paper adapts the theory of rank-order tournaments to provide a rationalization for these three features and to explore their implications for the design and sequencing of preferential trade agreements.  The role of trade diversion and its relationship to these features assumes a key role in this analysis. 
Edward Mansfield - Hum Rosen Professor of Political Science, University of Pennsylvania
Helen Milner - B. C. Forbes Professor of Politics and International Affairs, Princeton University
Jon Pevehouse - Assistant Professor of Political Science, University of Wisconsin
Title: “Democracy, Veto Players, and the Depth of Regional Integration”
In this paper, we examine the domestic political factors that might account for the choice of trade agreement that states adopt. States can pursue at least five types of trade agreements, in order of their depth of policy integration: non reciprocal trade agreements, free trade areas, customs unions, common markets and economic unions. What factors account for their choice of type? We argue that domestic politics should matter to this choice. The extent of policy that countries are willing to coordinate with other countries depends on each one’s domestic political constraints. In countries where more veto players exist, deeper cooperation is less likely. Using data from all pairs of countries since 1945, we show that, controlling for many other international and economic factors, domestic politics do matter to the choice of the type of trade agreement.
Andrew Moravcsik - Professor of Politics and Director, European Union Program, Princeton University
Title: “Sequencing and Path Dependence in European Integration"
This paper sruveys and evaluates some recent trends in the historiographical and political science literatures on sequencing and path dependence in the process of European integration.  It draws four main conclusions:  (1) A theoretical synthesis of endogenous policy theory, non-coercive interstate bargaining theory, and international regime theory provides a plausible account of European integration.  (2) There is substantial historical evidence in favor of this synthetic explantion, as opposed to explanations stressing geopolitical or ideological factors, international mediation and political entrepreneurship.  (3) These theories suggest a modest role for sequencing, particular as regards the impact of the order in which successive countries enter the EU.  (3) Efforts have long been made to advance theories, generally referred to as "historical institutionalist" or "neo-functionalist" that treat sequencing as a more important variable -- notably those that argue that integration is fundamentally "path dependent -- but little historical evidence supports such claims.  (4) Currently the process of European integration appears to have reached an institutional plateau.  There is now in place a "European Constitutional Compromise," about which theories in which sequencing plays a critical role five us little purchase.