[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

REGIONAL TRADING BLOCS
GATT and WTO have made some progress in reducing trade barriers among all
countries. But the difficulties of reaching agreements involving so many parties have
made progress slow. In the meantime, many countries have formed regional trade
blocs, agreeing with their more immediate neighbors not only to eliminate trade barriers
but also to facilitate the flow of capital and labor. Perhaps the most important
of these is the European Union, the successor to the Common Market, which now
embraces most of Europe. The North American Free Trade Agreement, NAFTA,
creates a free trade zone within North America—that is, an area within which goods
and services trade freely, without tariffs or other import restrictions. There are also
many smaller free trade zones, such as those between New Zealand and Australia, and
among groups of countries in Latin America and in Central America.
While the gains from internationally coordinated reductions in trade barriers
are clear, the gains from regional trading blocs are more controversial. Reducing
trade barriers within a region encourages trade by members of the trading bloc.
Lowering barriers among the countries involved results in trade creation. But it
also leads to trade diversion. Trade is diverted away from countries that are not
members of the bloc but might, in fact, have a comparative advantage in a particular
commodity. Under these conditions, the global net benefits will be positive if the
trade creation exceeds the trade diversion. Typically, when trade blocs are formed,
tariffs against outsiders are harmonized. If the external trade barriers are harmonized
at the lowest common level (rather than at the average or highest levels) at
the same time that internal trade barriers are lowered, the effects of trade creation
are more likely to exceed those of trade diversion.
Expanding regional trading blocs to cover investment flows raises particular
anxieties, especially when the bloc includes countries with very different standards
of living. During the debates over NAFTA, some argued that Mexico would suck up
huge amounts of investment that would otherwise have gone to businesses in the
United States. According to this view, American firms would move to Mexico to take
advantage of the low-wage labor and the capital that flowed to Mexico would not be
available for investment in the United States.
Such arguments failed to take into account that capital markets were already
global. Capital flows to good investment opportunities wherever they are. Good
opportunities to invest in the United States will attract capital, regardless of how
much Americans invest in Mexico. Investment barriers impede this flow of capital
to its most productive use, thereby lowering world economic efficiency.
Often trade debates are based on a “zero-sum” view of the world, the belief that
when one country (Mexico) gains, another (the United States) must lose. For example,
many people argue that when a country imports, it loses jobs: the gains to foreign
workers from their exports are at the expense of domestic firms to which those
jobs somehow belonged. The debate over “outsourcing”—the move by U.S. firms to
import goods and services that these same firms formerly produced in the United
States—is of this sort. Earlier in this chapter we learned what was wrong with this
argument. The theory of comparative advantage says that when countries specialize
in what they produce best, both countries are better off. Workers enjoy higher
448 ∂ CHAPTER 19 INTERNATIONAL TRADE AND TRADE POLICY