Regional Trade Groupings

Abstract

The creation of regional trade groupings is an aspect of international trade policy that has been vigorously pursued in the last two decades. A fundamental principle of GATT is that there should be no discrimination in the trade policy measures applied to imports of the same commodity from different sources. (In fact, it proved necessary to allow preference agreements existing when GATT was established in 1947 to continue; under Article 1, however, they could not be increased, and hence, as tariffs have been reduced, margins of preference have diminished.) Article 24 provides the only grounds on which new discriminatory arrangements can be established in the form of customs unions and free trade areas. According to Article 24 such agreements should lead to the complete removal of restrictions ‘on substantially all trade’ between the member countries, ‘within a reasonable period of time’ and without increasing the general level of protection against third countries. The founders of GATT permitted these discriminatory agreements in the belief that the removal of restrictions on mutual trade among a group of countries represented a movement towards free trade. Subsequent work on the theory of second best, however, has demonstrated that a partial movement towards free trade by the elimination of trade barriers among a restricted group of countries, which appears to fulfil more, but not all, of the (Paretian) optimum conditions, is not necessarily, nor is it even likely to be, superior to a situation in which fewer conditions are fulfilled (see Lipsey and Lancaster [37]).