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C H A P T E R 5
Introduction
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OES REGIONAL INTEGRATION ENCOURAGE EVOLUTION toward globally free trade, or does it place obstacles in its way, and perhaps even increase the likelihood of trade wars between competing blocs? The stakes in the bet as to whether RIAs are stepping stones to multilateral trade liberalization or millstones around its neck are truly huge.^1 Opening trade and increasing competition have been behind virtually every sustained economic growth experience, and the unprecedented postwar growth of world output and income has clearly been allied to the growth of world trade and trade liberalization. Progress here affects everyone, and is particularly important for the small and medium economies that depend heavily on international trade, and are the principal beneficiaries of an orderly and nondiscriminatory trading regime. This chapter takes up these issues. First, we investigate the external tariffs of RIAs, and ask whether there are reasons to believe that a world of relatively few large RIAs will have lower or higher tariffs than a world composed of a large number of separate countries. We then turn to the dynamics of the world trading system. Does the presence of RIAs create incentives for excluded countries to join existing RIAs, to form new RIAs of their own, or to change their external trade policy in other ways? What are the prospects for “open regionalism” as proposed by some APEC countries? This leads us into the effects of RIAs on multilateral trade negotiations—the rounds of GATT/WTO talks. Have RIAs prompted countries to initiate and become involved in these negotiations, and do they facilitate or impede successful outcomes of the talks? Finally, we turn to the rules of the WTO itself, and ask whether the WTO should treat RIAs differently from its present lax stance.
Trade Blocs and the World
Trading System
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5.1 How RIAs Set External Tariffs
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RE THERE ANY REASONS TO BELIEVE THAT A WORLD OF trading blocs is likely to be more prone to high tariffs between blocs than a world of separate nations? Some commentators have foreseen doomsday scenarios in which “Fortress Europe” and other major trade blocs engage in trade wars, damaging to themselves and above all to excluded developing regions. Is there any basis for such views? A famous insight on the possible effects of trade blocs on tariffs comes from Paul Krugman (1991a and 1991b). 2 He noted that trade barriers would be lowest—and consequently world income greatest—in two opposite circumstances. One is when there is a single world trade bloc containing all countries, that is, global free trade. The other is when trade policy is set by many small independent countries, each so small as to have no market power and no reason to deviate from free trade. How- ever, between these extremes each trading bloc has an incentive to use external tariffs to try and improve its terms of trade (reducing trade vol- umes to drive up the price of exports and reduce the price of imports). This reduces world real income, which reaches a minimum for some intermediate number of trade blocs. 3 Extending the insight in a simple (and not very robust) example, Krugman suggested that the worst num- ber of similar sized RIAs for world welfare was three. Each sets a tariff to try and turn the terms of trade in its own favor, but this can only be at the expense of other blocs. The “prisoners’ dilemma” in tariffs is worst with three prisoners! This paper sparked a large literature, and many counter-examples. Perhaps the most pertinent criticism of the analysis surrounds the fact that tariff setting and trade negotiations involve repeated interactions between the same countries or blocs, so that the simple logic of the prisoner’s dilemma need not apply. Countries or blocs may be able to cooperate, particularly if they perceive that the cost of breaking an agree- ment on tariffs is a future trade war, with all the costs this imposes. Analysis of this situation (for example, Bond and Syropoulos 1996a and 1996b) suggests that as bloc sizes get larger the returns to cheating on a trade agreement grow, but so too does the loss from the resulting trade war. In some cases at least, the former effect dominates, with the result that it is more difficult to maintain free trade in a world of large trading blocs, suggesting that regionalism increases the likelihood of protection. Considerable caution needs to be employed in interpreting these results;
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This work is useful for refuting the simple hypothesis that RIAs lead directly to protectionism and are consistent with the idea that regional- ism helps to lock in previous liberalization. However, the jury is still out on the issue; evidently many countries were seeking to liberalize trade by regional, multilateral, and possibly also unilateral routes, and we are far from knowing whether incentives for the multilateral and unilateral are sharpened or blunted by following the regional route.
5.2 The Dynamics of Regionalism
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N CHAPTER 1 WE SAW THE EXPLOSIVE GROWTH OF RIAS IN RECENT years. Is this, in part at least, because of an underlying dynamic by which forming a RIA increases the incentive for outside countries to become members, and so on, until the world is completely divided into RIAs? The process has been termed “domino regionalism” by Baldwin (1995), who analyzes how, after three decades of resistance, three Scandinavian countries decided to seek EU membership in the late 1980s. Although they were still uncomfortable with the EU politically, the economic pressures from the Single Market Program and from EU expansion were overwhelming. Arguably, the same process occurred when Canada sought access to the U.S.-Mexican talks that eventually created NAFTA, and motivated several Latin American and Caribbean countries to seek accession afterward. The same happened with Chile and Bolivia seeking association with MERCOSUR, with Mediterranean countries racing to get Euro-Med Agreements, and even perhaps with a number of late entrants seeking membership in the Cross-Border Initiative in Africa.^5 In part, the drive toward regional agreement is driven by positive example; countries perceive benefits of membership and act to join or set up RIAs. But in part, the force comes from perceived adverse effects of nonmembership.
The Costs of Nonmembership
Why might the existence of some RIAs create or increase incentives for other countries to join? One obvious reason is simply that countries perceive benefits of membership, and become increasingly unwilling to
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forgo them. But another, more malign reason, is that countries suffer from being left out, and it is this that creates the rush to join. So how does the existence of RIAs affect nonmember countries? The first and most direct way in which nonmembers are affected is through the change in trade flows caused by a RIA, causing both the exports and imports of nonmember countries to be smaller than they otherwise would have been. Such changes do not necessarily have an adverse effect, although there are several circumstances when they will. One is when they lead to a terms-of-trade deterioration for excluded economies. That is, the fall in demand for their exports (and reduction in supply of imports) may reduce their export price (and raise their import price). We saw in chapter 3 that member countries have gained from this, and that excluded country loss is simply the other side of the coin. Another set of circumstances under which excluded coun- tries will be harmed by the relative decline in their trade is if their trade flows are already too small, that is, if they are running at a level at which marginal benefits exceed marginal costs. This will happen if the excluded economies have their own restrictive trade policies in place. It will also happen if firms are operating in imperfectly competitive markets and are making a positive price-cost margin on each unit of sales. Losing sales in a RIA market might be particularly damaging to such firms, causing them to lose profits, and perhaps causing them to be unable to cover their fixed costs. Probably more importantly, countries fear that firms may relocate in search of the benefits of a larger market. This is consistent with what actually happened to FDI in Europe. Following announcement of the Single Market Program in the late 1980s, FDI fell in every single EFTA country. In order to restore their share of FDI, the governments of EFTA had little choice but to accept the Single Market Program. All except Switzerland did this, either by applying for EU membership or by join- ing the European Economic Area. Only once they had announced these moves did FDI recover (Baldwin, Forslid, and Haaland 1996). Another source of loss from nonmembership of RIAs is the risk at- tached to being isolated if a trade war occurs. Of course, all countries— inside or outside RIAs—will usually lose from a trade war, but countries in RIAs have the insurance of knowing that they will still have free trade with partner countries. Whalley (1996) undertakes some numerical simu- lations of the costs of being outside a bloc during a trade war, showing
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Open Regionalism?
Open regionalism originated from APEC whose leaders envisioned a community based on openness and free exchange of goods, services, and investment. The term open regionalism has been used in different ways, and with two quite distinct meanings. One is unconditional nondiscriminatory liber- alization (or concerted unilateralism). The idea is that as member states liberalize trade within the bloc, so they simultaneously cut trade barriers on imports from external countries as well. This was the definition of the early APEC advocates, who saw the coalition as a means of encouraging countries to liberalize together and so provide for each other some of the terms of trade and political economy benefits of a full GATT/WTO round. Relative to forming a RIA, the policy brings the additional gains of liber- alizing external trade and thereby removing the source of trade diversion. Relative to a liberalization by a single country, the fact that it would be concerted , with all members liberalizing together, brings additional ben- efits as access for imports is eased, so firms get improved access to partner markets; this reduces the likelihood of liberalization leading to a terms-of- trade loss. However, despite these attractions, the idea of concerted unilateralism does not now seem likely to make headway. Within APEC, the United States is implacably opposed to the idea. More generally, the WTO system is so firmly based on the notion of trade liberalization being a concession (to be granted in return for some concession by trading part- ners) that the idea is unlikely to catch on. A second, and quite different concept is open access whereby the RIA announces that any country willing to abide by its rules may join. In terms of the economics, such an arrangement is still preferential, giving discriminatory benefits to members. Its main importance would be as a stepping stone to multilateralism: Could an open access RIA attract an increasing number of members, to the point where almost all countries became members? Analytical treatments of this issue are not optimistic. As we saw in chapter 4, there is generally an optimal size for a RIA, from the point of view of existing members, so it is not clear why members should want unrestricted access. In practical terms, the feasibility of open ac- cess depends crucially on the depth of the scheme. Where a RIA in- volves few conditions, then open access can be quite easily envisaged. Perhaps the best example is the Cross-Border Initiative in East and
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southern Africa, in which neither internal preferences nor external tar- iff harmonization are rigorously enforced. But for deeper agreements, open access is harder to envisage. NAFTA, where the principal rules are completely free trade in goods and open investment, might seem to be a candidate, but has in fact re- jected many overtures. This seems more to avoid adjustment in the United States than because other issues such as quotas for professional migration or dispute settlement require negotiation. MERCOSUR has expressed will- ingness to accept new members, implying a degree of open access. How- ever, given that fairly deep integration is planned, detailed negotiation is required. Association—the status preferred by Chile— is easier, but does not offer full integration and still requires several years of talks. The EU stands ready to sign association agreements with many neigh- boring countries, and ostensibly with the African, Caribbean, and Pa- cific countries, but only on its own terms covering issues such as rules of origin, excluded sectors, the use of antidumping duties, and so on. Full membership in the EU is anything but open access. The United King- dom had to ask three times before it was allowed to join, and Turkey was rejected until recently. Negotiations are tortuous once accession is agreed in principle. Each of the five current Eastern European candidates faces a formidable list of demands and requirements prior to membership. In several cases they are required to adopt policies from which some exist- ing members have negotiated exemptions (such as the Social Chapter). Still, EU membership has increased from 6 to 15 countries and is ex- pected to increase to 25 countries over the next decade or so. In practice, what we are seeing here is essentially that any country is free to apply; but the price of entry is set separately for each entrant. This can lead to asymmetric agreements in which benefits to developing country candidates are reduced and possibly appropriated by existing members through side conditions on issues such as the environment, labor regula- tions, and rules of origin. Since the more complex aspects of RIAs—espe- cially those with budgetary implications— have to be negotiated, access can never be automatic and unconditional. In practice, it will not be easy for the WTO to write or enforce general rules for open access, and it is unlikely that this route will lead to ever expanding membership. However, even though full and unconditional open access to RIAs is unlikely to be feasible, increased access by developing countries to the markets of the trade blocs in the industrial North is more likely through
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Multilateralism as a Response to Regionalism
The first argument is that countries outside RIAs may react to their exclusion by attempting to accelerate multilateral liberalization. Many commentators suggest that the creation of the EEC in 1957 had this ef- fect. This, they suggest, led directly to the Dillon and Kennedy Rounds of GATT negotiations as the United States sought to mitigate the EEC’s potential for diverting trade (Lawrence 1991; Sapir 1993; WTO 1995). Although perfectly conceivable, this is not a straightforward argument. First, it seems unlikely that multilateral negotiations would have stopped completely had the EEC not been created, especially given the global reach of the United States during the 1960s. Thus, at most, the EEC affected the timing, not the occurrence, of the Rounds. Second, agriculture played an important role in the formation of the EEC, and the EEC was probably more successful in resisting that sector’s liberal- ization in the multilateral trade negotiations than its individual mem- bers would have been. This has probably made future liberalization more, not less, difficult. Third, suppose that the hypothesis were true, that the creation of the EEC had led to negotiations. The logic of the argument is essentially coercive: EEC members did something that their trading partners considered harmful, and then offered to mitigate it in return for concessions. Coercion may be warranted and the outcome may have been beneficial, but this is a dangerous game. It depends critically on the willingness of the partners to fold—(by negotiating) rather than fight (by raising tariffs) and to respond multilaterally rather than regionally. It has also been argued that regionalism was behind the Tokyo Round. Winham (1986) reports both the first EEC enlargement (in- cluding free trade with EFTA) and the restrictiveness of Europe’s Com- mon Agricultural Policy as factors in the United States desire for a Round. The former observation seems no more compelling than those surrounding the creation of the EEC, while the latter is distinctly two- edged: it is based on regionalism having increased trade restrictions in agriculture (Common Agricultural Policy), and a response to this be- ing negotiation. For the net effect of this on multilateral progress to be beneficial requires a negotiating structure in which might and countervailing power are the critical elements of liberalization. Finally, consider the Uruguay Round, of which the WTO (1995) says, “There is little doubt that...the spread of regionalism [was a] major factor in eliciting the concessions needed to conclude” the Round. There
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was, indeed, a perception that the failure of the Round would lead to regional fragmentation. This almost certainly encouraged the spread of defensive regionalism, but whether this pressured the two major parties to agree is not clear, for they were the prime “regionalists,” and they would certainly not have been the principal casualties of fragmentation. Some senior EU negotiators have said that the 1993 Seattle APEC Sum- mit induced the EU finally to concede on agriculture and conclude the Uruguay Round (Bergsten 1997). Again, this may be true, but there are counter-arguments. For example, APEC was not advertised as a discrimi- natory RIA, and any discrimination would, anyway, have been far in the future. Also, the principal necessary condition for the EU to complete the round was agricultural reform, which was initiated in 1990 and com- pleted in 1992 (Hathaway and Ingco 1996).
Does Regionalism Facilitate Negotiation?
If regional integration agreements made trade negotiations easier, perhaps they would help the world evolve toward freer trade. Coordi- nated coalitions may have greater negotiating power than their mem- bers do individually and such coalitions may facilitate progress just by reducing the number of players represented in a negotiation (Kahler 1995). Whether this really occurs is a moot point. For example, a nego- tiation comprising one dominant partner and a competitive fringe of small countries might be easier and proceed further than if the fringe coalesced into a significant counterforce. This line of reasoning prejudges the issue of whether blocs are genu- inely unified in their approach to trade negotiations. This is not usually so, meaning that any gains from having fewer players in the last stage of a negotiation are offset by the complexity of agreeing joint positions in the first phase. The difficulties of achieving a European position on ag- riculture and cultural protection in the Uruguay Round are well known, and formulating EEC positions in the Tokyo Round proved complex (Winham 1986). Moreover, two-stage negotiations need not be more liberal than single-stage ones (Basevi, Delbono, and Mariotti 1995). To be sure, Germany and the United Kingdom pressured France to agree to the agricultural deal in the Uruguay Round, but the liberalizers had to make potentially trade-restricting concessions on “commercial defense instruments” to clinch the deal. Wang and Winters (1998) argue that
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harmonization between similar or like-minded countries is feasible when multilateral progress is not. As we have seen (chapter 4) the EU has addressed a wide range of “deep integration” issues; NAFTA has tackled investment; Brazil has free trade in information technology goods within MERCOSUR; Chile and Canada have eschewed antidumping actions on mutual trade. 8 But until recently even RIAs among industrial countries, let alone those among developing ones, had not advanced much further with lib- eralization than had the multilateral system (Hoekman and Leidy 1993). Thus, for example, agriculture frequently remained restricted, transport, culture, and other sensitive services were excluded; and government pro- curement was ignored de facto if not de jure. The EU, especially in the Single Market Program, has now advanced further, but this took 30 years to initiate and is, to date, unique. Overall, RIAs have not led on the tough issues to the extent that is sometimes supposed. The benefit of having RIAs tackle these “tough issues” depends heavily on whether they are liberalizing and whether they are otherwise well- suited to developing country needs and capacities. The EU has used the Europe Agreements to obtain action on environmental and labor condi- tions and on intellectual property, and the United States has used NAFTA as a tool for enforcing Mexican labor and environmental standards. It is quite possible that practices developed by the major RIAs will not suit developing countries well, and may also be less open and liberal. An extension of the “tough issues” argument is that RIAs help develop blueprints for subsequent multilateral negotiations (Bergsten 1996). For example, the EU pioneered “bulk” mutual recognition for industrial stan- dards and services harmonization, and NAFTA’s investment chapter may inform a multilateral investment negotiation (if there is one). On the other hand, the EEC also suggested the Common Agricultural Policy as a model for agriculture in the Kennedy Round. Once again then, the blueprints might not suit developing countries well. There is the further danger that coming to negotiations with a fully developed blueprint can appear to be a pressure tactic that actually makes negotiation more difficult; develop- ing countries’ de facto rejections of the OECD draft Multilateral Agree- ment on Investment in 1998 contains at least an element of this. Overall then, we find the arguments that regionalism has promoted or facilitated multilateral trade negotiations to be rather weak. There is little evidence that RIAs have either prompted or facilitated negotiations, and real dangers that they might dilute countries’ involvement in such negotiations.
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5.4 Regionalism and the WTO
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HE PREVIOUS ANALYSIS SUGGESTS THAT INTERNATIONAL policy toward regionalism should aim to:
- Encourage RIAs to achieve trade creation and avoid trade diver- sion, both for the sake of members and to minimize harm to ex- cluded countries, for instance, by setting low external tariffs
- Permit deep integration, including nation building, between members
- Preserve the effects of previous liberalization and provide credibil- ity for any liberalization that form part of the RIA
- Support a liberalizing dynamic within member countries and in the world trading system as a whole. The instrument we have for international policy on regionalism is the WTO, and this section explores how it manages regionalism and whether its rules could be reformed to help it do better. 9 RIAs are officially sanc- tioned—but conditional—exceptions to the GATT’s rules on nondis- crimination. The conditions imposed on RIA formation doubtless con- strain and mold the pattern of regionalism in the world, but they are neither adequate, nor adequately enforced, to ensure that regionalism is economically beneficial for either its members or excluded countries. The responsibility for good outcomes falls on governments themselves; they cannot tie their own or each other’s hands sufficiently tightly in the WTO to preclude the possibilities of signing harmful RIAs. The world trade system works—pragmatically and consensually. The GATT was created in 1947 as a temporary body to assist countries in trade liberalization. Its role was to codify and record a series of tariff reduc- tions that its members wished to make, and provide a structure to give credibility to those reductions. It discouraged the reversal or nullification of tariff cuts by restricting policies that impose duties on an ad hoc basis, such as antidumping duties and emergency protection, and equivalent policies such as internal taxes on imports. It also defined important me- chanics of trade, such as the valuation of trade for customs purposes. A key concept of the GATT, indeed the cornerstone of the present world trading system, is nondiscrimination between different sources of the same imported good, which is achieved by requiring members to give each other MFN treatment, except in specified circumstances. With an assurance of
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trade policies onto their partners. These four links provide the frame- work for assessing the WTO’s current rules about RIAs and exploring whether they can be improved.
5.5 The Rules for RIAs
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RTICLE XXIV OF THE GATT SETS LIMITS ON THE RIGHTS OF RIA member countries to violate the MFN principle. It imposes three principal restrictions (appendix 1). A RIA must:
- Not “on the whole” raise protection against excluded countries
- Reduce internal tariffs to zero and remove “other restrictive regula- tions of commerce” other than those justified by other GATT ar- ticles
- Cover “substantially all trade.” These conditions ensure that RIAs do not undermine the access of other countries to the RIA market. The first preserves the sanctity of tariff bindings by ensuring that forming a RIA does not result in a whole- sale dissolution of previous bindings. It is supplemented by a rule that compensation is due to individual partners for tariff increases induced by the RIA if other reductions to keep the average constant do not main- tain a fair balance of concessions. Together with the 1994 Uruguay Round Understanding on the Interpretation of Article XXIV on how to mea- sure tariff barriers for RIAs, these provisions offer reasonable assurances that the barriers facing nonmembers will not be raised. The second condition helps defend the MFN principle by making it subject to an “all-or-nothing” exception. If countries were free to nego- tiate different levels of preference with each trading partner, binding and nondiscrimination would be fatally undermined: no member could be sure that it would receive the benefits it expected from negotiating and reciprocating for a partner’s tariff reduction. Also, if a customs union is a first step toward nation building, it is inappropriate for an interna- tional trade treaty to stand in the way of such progress. Thus, internal free trade, such as one (usually) achieves within a single country, would seem to be an acceptable derogation of MFN, whereas preferences would not. The third condition reinforces this by requiring a serious degree of commitment to a RIA in terms of sectors. The second and third conditions—no internal tariffs and substantial coverage—are important in heading off pressure to use tariffs to fine-tune
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political favoritism toward either domestic industries or partner countries; they help to prevent governments that restrict RIAs from swapping trade- diverting concessions and, thus, from avoiding politically more painful trade creation. These conditions essentially require a serious commitment to integrating member markets as a condition for proceeding. Article XXIV is generally an aid to better RIAs, but it is certainly not sufficient for good economic policy. Even if the conditions were applied without exception they would not preclude harmful RIAs: Wholly GATT- compatible RIAs can be predominantly trade diverting, excluded coun- tries can suffer terms-of-trade declines, and institutions can arise that make liberal policies less likely. There are major difficulties in interpreting the conditions of Article XXIV. Even following the Uruguay Round Understanding there is no agree- ment about what “substantially all trade” means, nor even whether it re- fers to the proportion of actual trade covered or the inclusion of all major sectors of the economy. Similarly the treatment of nontariff barriers in assessing the overall level of trade restriction is not defined, nor is that of rules of origin. The requirement that “other restrictive regulations of com- merce” be removed between members is ambiguously worded: several ex- ceptions to this requirement are identified explicitly but other barriers, including antidumping duties and emergency protection, are not. Com- plete integration between members of a RIA would abolish these barriers and so their continuation—in NAFTA or the Euro-Med agreements— suggests an unwillingness to proceed too far in that direction. Perhaps because of its ambiguities, Article XXIV has been notori- ously weakly enforced. RIAs have to be notified to the GATT and until 1996, each was then reviewed by an ad hoc working party to see if it was in conformity with the Article. WTO (1995) reports that of 69 working parties reporting up to and including 1994, only 6 were able to agree that a RIA met the requirements of Article XXIV, of which only CARICOM and Czech-Slovak CU remain operative. However, the re- mainder did not conclude that agreements were not in conformity— they merely left the matter undetermined. This agnosticism is essentially the product of the GATT’s consensual nature. The first major test of the article was the Treaty of Rome estab- lishing the EEC. The political pressure to permit it was enormous: EEC countries would almost certainly have put the EEC before the GATT in the event of conflict and the United States strongly supported the treaty. The treaty, however, clearly violated Article XXIV, and so the only fea- sible solution was not to push the review to conclusion. 11 Given a start
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relaxes the conditions for creating RIAs that include only developing countries. It drops the conditions on the coverage of trade, and allows developing countries to reduce tariffs on mutual trade in any way they wish, and nontariff measures “in accordance with criteria which may be prescribed” by the WTO members. It then supplements the first condi- tion with the nonoperational requirement that the RIA not constitute a barrier to MFN tariff reductions or cause “undue difficulties” for other contracting parties. In practice, developing countries have had virtual carte blanche. Twelve preferential arrangements have been notified under the Enabling Clause, including the Latin American Integration Association, ASEAN, and the GCC. Internal preferences of 25 percent and 50 percent figured in ASEAN’s trading plans and also in many of the arrangements concluded under the Latin American Integration Association and in the GCC. There is little sign that internal preferences have undermined MFN agreements with other trading partners but then, until recently, these countries did not make many MFN agreements. Indeed, until the late 1980s, the Latin American and African countries’ frequent use of regional arrangements and weak participation in the multilateral rounds might suggest a sub- stitution of one form of liberalization for the other. More worrying were the sectoral agreements that abounded in Latin America. The Enabling Clause dilutes the weak discipline that Article XXIV imposes. Even if Article XXIV does not actually stop many harmful prac- tices, it does at least avoid automatically giving them the respectability of legal cover. Thus, while the GATT knowingly and willingly permit- ted Latin American Free Trade Area (1960) and the initial notification of ASEAN (1977) to violate Article XXIV (Finger 1993), at least it re- quired continuing consultation with partners and left open the possibil- ity of challenge in the dispute settlement process. The Enabling Clause offers more cover in various areas, and thus erodes even this discipline. 16
Reform of the Rules?
The WTO rules on RIAs are not exactly broken, but they are creaky, and it is worth asking what might be done about them. We focus here on their economic content, and on the feasibility of reform. Feasibility seems to be a more binding constraint than devising economically sen- sible rules. Indeed, major political backing for tightening looks im-
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probable, as few countries within RIAs appear to seek tighter disci- pline, as the EU continues its Mediterranean agreements and consid- ers replacing the trade provisions of the Lomé Convention with an FTA, and as the United States contemplates the Free Trade Area of the Americas. 17 However, see section 5.6 for a proposal on changing rules for both industrial and developing countries. A RIA that does not reduce external barriers may cause trade diver- sion. One discipline on this would be to require RIA members to liber- alize, both to reduce diversion and to induce external trade creation with nonmembers. Finger (1993) views these reductions as a price to be ne- gotiated to persuade nonmembers to forgo their MFN rights. How far the parties are prepared to go in a negotiation, however, is determined by the prevailing rules and enforcement mechanisms that define the outcome if negotiations fail; unfortunately, these currently leave non- members almost no negotiating power. Hence other authors have made more concrete proposals. Bhagwati (1993) suggests requiring that for each tariff heading a CU’s common external tariff be bound at the minimum tariff for that head- ing among all members. This does not guarantee the elimination of trade diversion—suppose the tariffs of three members were 98 percent, 99 percent, and 100 percent—but it will clearly reduce it. It would impose a high (mercantilist) price on RIA formation, so only “serious” integra- tors would pay it, and would, overall, be quite trade-liberalizing. As a reform it is admirably clear, and if feasible, it would be desirable eco- nomically. Its demanding nature, however, makes it very unlikely to suc- ceed in the present circumstances. Related is a proposal that members of FTAs be required to bind their tariffs at actual applied rates on the eve of the RIA. Apart from what this might do to pre-FTA applied rates, this suggestion is ran- dom in its liberalizing effect, which reduces its moral force. Bhagwati would just ban FTAs. This is also consistent with seeking to restrict RIAs to those that are committed to far-reaching integration, but again faces severe feasibility constraints, especially since some FTAs proceed quite far in other directions. Tied up with the FTA question is that of rules of origin. Some sug- gest a requirement that they be no more restrictive than before the RIA, but this is difficult to determine, ad hoc, manipulable in nature, and potentially very complex in the face of technological changes. Bet- ter would be a requirement precluding the manipulation of such rules
