《国际政治经济学》文献资料（Political Economy of Regionalization and Globalization）Multilateral Determinants of Regionalism The Effects of GATTWTO on the Formation of Preferential Trading Arrangements

Multilateral Determinants of Regionalism:The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements Edward D.Mansfield and Eric Reinhardt Abstract Preferential trading arrangements(PTAs)have spread widely over the past fifty years.During the same era,multilateral openness has grown to unprec- edented heights,spurred by the General Agreement on Tariffs and Trade (GATT) and its successor,the World Trade Organization (WTO).If the cornerstone of the manifestly successful multilateral regime is nondiscrimination,why have its mem- bers increasingly resorted to preferential liberalization?We argue that developments at the heart of GATT/WTO encourage its members to form PTAs as devices to ob- tain bargaining leverage within the multilateral regime.Specifically,the growth in GATT/WTO membership,the periodic multilateral trade negotiation rounds,as well as participation and,especially,losses in formal GATT/WTO disputes,have led its members to seek entrance into PTAs.Conducting the first statistical tests on the sub- ject,we find strong evidence in support of this argument. What are the problems of the GATT that lead countries to turn to their neigh- borhood instead? Paul Krugman(1993,73) During the past fifty years,the international trading system has been marked by the rapid proliferation of preferential trading arrangements(PTAs).During the same era,multilateral openness has grown to unprecedented heights,spurred by the General Agreement on Tariffs and Trade(GATT)and its successor,the World Trade Organization (WTO).That these developments have occurred in tandem is some- what surprising.Whereas the norm of nondiscrimination in trade is the corner- For helpful comments,we are grateful to Marc Busch,Peter Gourevitch,David Lake,Lisa Martin, Joy Mazumdar,Helen Milner,Thomas Oatley,Caglar Ozden,Francisco Parodi,Jon Pevehouse,Jay Smith,Jeffrey Stacey,Chris Zorn,and two anonymous reviewers.For research assistance,we thank Yoram Haftel,Jesse Hamner,and Jon Pevehouse.Earlier versions of this article were presented at the 2000 Annual Meeting of the American Political Science Association,Washington,D.C.;the 2001 An- nual Meeting of the Midwest Political Science Association,Chicago;and seminars at Emory Univer- sity,the University of Chicago(PIPES),the University of Illinois,and the University of Wisconsin. International Organication 57,Fall 2003,pp.829-862 2003 by The IO Foundation. D0:10.1017/S0020818303574069

Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements Edward D+ Mansfield and Eric Reinhardt Abstract Preferential trading arrangements ~PTAs! have spread widely over the past fifty years+ During the same era, multilateral openness has grown to unprec￾edented heights, spurred by the General Agreement on Tariffs and Trade ~GATT! and its successor, the World Trade Organization ~WTO!+ If the cornerstone of the manifestly successful multilateral regime is nondiscrimination, why have its mem￾bers increasingly resorted to preferential liberalization? We argue that developments at the heart of GATT0WTO encourage its members to form PTAs as devices to ob￾tain bargaining leverage within the multilateral regime+ Specifically, the growth in GATT0WTO membership, the periodic multilateral trade negotiation rounds, as well as participation and, especially, losses in formal GATT0WTO disputes, have led its members to seek entrance into PTAs+ Conducting the first statistical tests on the sub￾ject, we find strong evidence in support of this argument+ What are the problems of the GATT that lead countries to turn to their neigh￾borhood instead? Paul Krugman ~1993, 73! During the past fifty years, the international trading system has been marked by the rapid proliferation of preferential trading arrangements ~PTAs!+ During the same era, multilateral openness has grown to unprecedented heights, spurred by the General Agreement on Tariffs and Trade ~GATT! and its successor, the World Trade Organization ~WTO!+ That these developments have occurred in tandem is some￾what surprising+ Whereas the norm of nondiscrimination in trade is the corner￾For helpful comments, we are grateful to Marc Busch, Peter Gourevitch, David Lake, Lisa Martin, Joy Mazumdar, Helen Milner, Thomas Oatley, Çaglar Özden, Francisco Parodi, Jon Pevehouse, Jay Smith, Jeffrey Stacey, Chris Zorn, and two anonymous reviewers+ For research assistance, we thank Yoram Haftel, Jesse Hamner, and Jon Pevehouse+ Earlier versions of this article were presented at the 2000 Annual Meeting of the American Political Science Association, Washington, D+C+; the 2001 An￾nual Meeting of the Midwest Political Science Association, Chicago; and seminars at Emory Univer￾sity, the University of Chicago ~PIPES!, the University of Illinois, and the University of Wisconsin+ International Organization 57, Fall 2003, pp+ 829–862 © 2003 by The IO Foundation+ DOI: 10+10170S0020818303574069

830 International Organization stone of GATT/WTO,PTAs vest each member with preferential access to the other participants'markets.Equally surprising is that most preferential groupings are composed of GATT/WTO members.It is not clear why states form preferential economic blocs when they belong to a successful multilateral regime.How the spread of PTAs will affect the GATT/WTO system has been widely studied and fiercely debated.Remarkably little research,however,has addressed how,if at all,the multilateral regime has conditioned the spread of PTAs. We argue that GATT/WTO has played a large role in stimulating the formation of PTAs.A central reason why states enter PTAs is to increase their bargaining power.Preferential arrangements serve this purpose by furnishing states with insurance against the emergence of conditions within GATT/WTO that could threaten their economic interests,as well as by giving states a greater voice in multilateral trade talks and increasing their market power.Developments within the multilateral regime can create incentives for states to enhance their bargaining power,thereby triggering the establishment of preferential groupings.These developments include the growth of GATT/WTO membership,which has reduced each participant's leverage over the pace and path of multilateral liberalization. Such growth has also heightened collective action problems within the regime, making it progressively more difficult to conclude new multilateral agreements, monitor members'behavior,and enforce the regime's rules.Forming a PTA com- posed of a small group of members with similar economic interests can help states insure against the adverse consequences stemming from these problems. In addition,the central vehicles used to promote an open global trading system- the periodic multilateral trade negotiations(MTNs)sponsored by GATT/WTO- can prompt members to enter PTAs as a means of guaranteeing they will not be left behind if the MTN stalls and of boosting their bargaining position in the multi- lateral talks.Therefore,states have reasons to establish a PTA during multilateral negotiating rounds.Trade disputes among GATT/WTO members are also likely to influence whether and when states accede to a preferential arrangement.A country embroiled in a GATT/WTO dispute may seek PTAs with third parties in the hopes of improving its leverage in the conflict.Likewise,losing a GATT/WTO dispute can impel a state to form preferential arrangements with third parties to obtain countervailing market access,insurance against future GATT/WTO enforcement failures,or additional bargaining leverage. To test these arguments,we conduct one of the first systematic analyses of PTA formation within GATT/WTO.The evidence strongly supports our claims. Countries are more likely to form a PTA when(1)GATT/WTO membership rises, (2)a multilateral negotiating round is taking place,and (3)they have recently participated in a GATT/WTO dispute,especially when (4)they obtained an unsatisfactory outcome in the dispute.More generally,our results indicate that while 1.See Bhagwati 1993;Bhagwati and Panagariya 1996;Krugman 1993;Lawrence 1996;Mansfield and Milner 1999;Oye 1992;Pomfret 1997;and WTO 1995a

stone of GATT0WTO, PTAs vest each member with preferential access to the other participants’ markets+ Equally surprising is that most preferential groupings are composed of GATT0WTO members+ It is not clear why states form preferential economic blocs when they belong to a successful multilateral regime+ How the spread of PTAs will affect the GATT0WTO system has been widely studied and fiercely debated+ 1 Remarkably little research, however, has addressed how, if at all, the multilateral regime has conditioned the spread of PTAs+ We argue that GATT0WTO has played a large role in stimulating the formation of PTAs+ A central reason why states enter PTAs is to increase their bargaining power+ Preferential arrangements serve this purpose by furnishing states with insurance against the emergence of conditions within GATT0WTO that could threaten their economic interests, as well as by giving states a greater voice in multilateral trade talks and increasing their market power+ Developments within the multilateral regime can create incentives for states to enhance their bargaining power, thereby triggering the establishment of preferential groupings+ These developments include the growth of GATT0WTO membership, which has reduced each participant’s leverage over the pace and path of multilateral liberalization+ Such growth has also heightened collective action problems within the regime, making it progressively more difficult to conclude new multilateral agreements, monitor members’ behavior, and enforce the regime’s rules+ Forming a PTA com￾posed of a small group of members with similar economic interests can help states insure against the adverse consequences stemming from these problems+ In addition, the central vehicles used to promote an open global trading system— the periodic multilateral trade negotiations ~MTNs! sponsored by GATT0WTO— can prompt members to enter PTAs as a means of guaranteeing they will not be left behind if the MTN stalls and of boosting their bargaining position in the multi￾lateral talks+ Therefore, states have reasons to establish a PTA during multilateral negotiating rounds+ Trade disputes among GATT0WTO members are also likely to influence whether and when states accede to a preferential arrangement+ A country embroiled in a GATT0WTO dispute may seek PTAs with third parties in the hopes of improving its leverage in the conflict+ Likewise, losing a GATT0WTO dispute can impel a state to form preferential arrangements with third parties to obtain countervailing market access, insurance against future GATT0WTO enforcement failures, or additional bargaining leverage+ To test these arguments, we conduct one of the first systematic analyses of PTA formation within GATT0WTO+ The evidence strongly supports our claims+ Countries are more likely to form a PTA when ~1! GATT0WTO membership rises, ~2! a multilateral negotiating round is taking place, and ~3! they have recently participated in a GATT0WTO dispute, especially when ~4! they obtained an unsatisfactory outcome in the dispute+ More generally, our results indicate that while 1+ See Bhagwati 1993; Bhagwati and Panagariya 1996; Krugman 1993; Lawrence 1996; Mansfield and Milner 1999; Oye 1992; Pomfret 1997; and WTO 1995a+ 830 International Organization

Multilateral Determinants of Regionalism 831 GATT/WTO has made considerable headway in liberalizing foreign trade,it has also had various unintended consequences.Particularly important is that develop- ments and institutional features associated with the growth of multilateral liberalization-such as rising GATT/WTO membership,MTNs,and active dispute settlement-create incentives for states to seek bilateral commercial arrangements in hopes of obtaining the greatest possible benefits from the multilateral regime. Discrimination in a 'Nondiscriminatory'System The central feature of all PTAs is the special market access that each member grants the other participants.Members set lower trade barriers on goods produced within the preferential grouping than on those produced elsewhere.These institutions-which include agreements that partially liberalize commerce,free trade areas(FTAs),customs unions,and common markets-have dotted the international landscape for centuries,but they have become increasingly pervasive in the past fifty years.Dozens have formed since the conclusion of World War II,and the concentration of trade flows has risen substantially within many PTAs,leading to widespread agreement that these groupings have become key elements of the in- ternational political economy.2 Because PTAs are generally made up of countries located in the same geograph- ical region,the spread of these arrangements has led many observers to conclude that commercial regionalism is on the rise.As shown in Figure 1,two distinct waves of regionalism took place during the second half of the twentieth century.3 The first occurred from the late 1950s through the 1970s;the second occurred in the 1990s. Most PTAs formed since World War II have been composed of parties to GATT and the WTO;and,at present,virtually every WTO member belongs to some type of preferential arrangement.4 From its inception,GATT attempted to regulate these arrangements.Article XXIV of the 1947 General Agreement on Tariffs and Trade- GATT's founding document-stipulates that member-states are permitted to form a PTA only if it eliminates barriers to "substantially all the trade"among its mem- 2.Serra et al.1997,8. 3.See Bhagwati 1993;and Mansfield and Milner 1999. 4.WTO 1995a.In this article,we are only concerned with"reciprocal"PTAs.Nonreciprocal agree- ments,such as the Generalized System of Preferences,are ones in which advanced industrial states unilaterally grant preferential market access to developing countries without requiring any trade con- cessions in return.The consequences for the trading regime are profoundly different than when pref- erences are reciprocal.Ozden and Reinhardt 2003.While virtually every party to the WTO belongs to some PTA,only about half of them belong to a reciprocal PTA,as shown in Figure 2. 5.Provisions for forming PTAs were made at the time of GATT's establishment because it was apparent that this body would be hard pressed to forbid states from doing so.In addition,some deci- sion makers seemed to believe that Article XXIV's requirement that PTAs remove all trade barriers among members would complement GATT initiatives to promote multilateral openness.Bhagwati 1993, 35-36

GATT0WTO has made considerable headway in liberalizing foreign trade, it has also had various unintended consequences+ Particularly important is that develop￾ments and institutional features associated with the growth of multilateral liberalization—such as rising GATT0WTO membership, MTNs, and active dispute settlement—create incentives for states to seek bilateral commercial arrangements in hopes of obtaining the greatest possible benefits from the multilateral regime+ Discrimination in a ‘Nondiscriminatory’ System The central feature of all PTAs is the special market access that each member grants the other participants+ Members set lower trade barriers on goods produced within the preferential grouping than on those produced elsewhere+ These institutions—which include agreements that partially liberalize commerce, free trade areas ~FTAs!, customs unions, and common markets—have dotted the international landscape for centuries, but they have become increasingly pervasive in the past fifty years+ Dozens have formed since the conclusion of World War II, and the concentration of trade flows has risen substantially within many PTAs, leading to widespread agreement that these groupings have become key elements of the in￾ternational political economy+ 2 Because PTAs are generally made up of countries located in the same geograph￾ical region, the spread of these arrangements has led many observers to conclude that commercial regionalism is on the rise+ As shown in Figure 1, two distinct waves of regionalism took place during the second half of the twentieth century+ 3 The first occurred from the late 1950s through the 1970s; the second occurred in the 1990s+ Most PTAs formed since World War II have been composed of parties to GATT and the WTO; and, at present, virtually every WTO member belongs to some type of preferential arrangement+ 4 From its inception, GATT attempted to regulate these arrangements+ 5 Article XXIV of the 1947 General Agreement on Tariffs and Trade— GATT’s founding document—stipulates that member-states are permitted to form a PTA only if it eliminates barriers to “substantially all the trade” among its mem- 2+ Serra et al+ 1997, 8+ 3+ See Bhagwati 1993; and Mansfield and Milner 1999+ 4+ WTO 1995a+ In this article, we are only concerned with “reciprocal” PTAs+ Nonreciprocal agree￾ments, such as the Generalized System of Preferences, are ones in which advanced industrial states unilaterally grant preferential market access to developing countries without requiring any trade con￾cessions in return+ The consequences for the trading regime are profoundly different than when pref￾erences are reciprocal+ Özden and Reinhardt 2003+ While virtually every party to the WTO belongs to some PTA, only about half of them belong to a reciprocal PTA, as shown in Figure 2+ 5+ Provisions for forming PTAs were made at the time of GATT’s establishment because it was apparent that this body would be hard pressed to forbid states from doing so+ In addition, some deci￾sion makers seemed to believe that Article XXIV’s requirement that PTAs remove all trade barriers among members would complement GATT initiatives to promote multilateral openness+ Bhagwati 1993, 35–36+ Multilateral Determinants of Regionalism 831

832 International Organization 407 35 30 20 15 10 5 0 1948-52 1958-62 1953-57 68-72 63-67 1978-82 1973-77 1988-92 1983-87 1993-97 Year Note:Year indicates the date that PTAS entered. FIGURE 1.Number of new reciprocal PTAs notified to GATT/WTO,1948-98 bers and does not "on the whole"increase protectionism against nonmembers.5 Further,the Enabling Clause,which was adopted by GATT in 1979,permits de- veloping countries to furnish preferences to one another through the creation of PTAs that do not adhere to Article XXIV.7 These efforts to regulate the formation of PTAs,however,have met with little success.As Jagdish Bhagwati points out,with respect to such arrangements,the multilateral regime"is so full of holes in its discipline that almost anything goes." Members have been required to notify new preferential groupings to GATT work- ing parties (before 1995)and to the WTO's Committee on Regional Trade Agree- ments(since 1995).These bodies-which assess the degree of compliance by PTAs with GATT/WTO rules-have failed to reach judgment on all but one of the 118 PTAs submitted for review,mostly because of differences among members about 6.See Bhagwati 1993;and WTO 1995b,791. 7.WT01995a,18-19. 8.Bhagwati 1993,44

bers and does not “on the whole” increase protectionism against nonmembers+ 6 Further, the Enabling Clause, which was adopted by GATT in 1979, permits de￾veloping countries to furnish preferences to one another through the creation of PTAs that do not adhere to Article XXIV+ 7 These efforts to regulate the formation of PTAs, however, have met with little success+ As Jagdish Bhagwati points out, with respect to such arrangements, the multilateral regime “is so full of holes in its discipline that almost anything goes+” 8 Members have been required to notify new preferential groupings to GATT work￾ing parties ~before 1995! and to the WTO’s Committee on Regional Trade Agree￾ments ~since 1995!+ These bodies—which assess the degree of compliance by PTAs with GATT0WTO rules—have failed to reach judgment on all but one of the 118 PTAs submitted for review, mostly because of differences among members about 6+ See Bhagwati 1993; and WTO 1995b, 791+ 7+ WTO 1995a, 18–19+ 8+ Bhagwati 1993, 44+ FIGURE 1. Number of new reciprocal PTAs notified to GATT/WTO, 1948–98 832 International Organization

Multilateral Determinants of Regionalism 833 what constitutes compliance.As a WTO staff member observes,"history has proved this to be one of the most unsatisfactory of all GATT procedures."10 Con- sequently,a former GATT Deputy Director General concluded,"Of all the GATT articles,this [Article XXIV]is one of the most abused.[New PTA members]have little fear that they will be embarrassed by some GATT body finding them in vi- olation of their international obligations and commitments and recommending that they abandon or alter what they are about to do." In fact,GATT/WTO members joining a PTA routinely violate Article XXIV. Trade barriers within preferential arrangements are almost never completely elim- inated and members frequently raise trade barriers on nonmembers'products. Germany's average tariff on third parties,for example,nearly doubled after its accession to the European Economic Community in 1958.12 To align with the European Union's (EU)textile and apparel import regime,Turkey increased its quantitative restrictions against outside states after signing an FTA with the EU in 1995.13 Similarly,Mexico,Israel,and the members of the Mercado Comiin del Cono Sur(Mercosur)increased their external trade barriers after joining PTAs.4 Even preferential groupings whose members have not raised their external trade barriers often inflict some damage on third parties,if for no other reason than because the preferential access granted to members'products degrades the com- petitiveness of nonmembers'products within the PTA.15 To be clear,we are not claiming that PTAs generally have been economically harmful.Although the available evidence indicates that some PTAs-especially those composed of developing countries-have had adverse economic conse- quences,various studies conclude that other arrangements-particularly those formed in recent years-have promoted economic welfare.16 Regardless,the wel- fare implications of PTAs do not directly bear on the issues addressed here. Nonetheless,the fact that GATT/WTO has been unable to prevent PTAs from enacting policies that place third parties at a competitive disadvantage in inter- national markets suggests that,contrary to the view of some observers,GATT WTO has not "made the world safe for regionalism."7 Rather,we argue that 9.See Crawford and Laird 2001;Sampson 1996,90;and WTO 1995a,63,and 1999a. 10.Sampson1996,90. 11.WT01995a,63. 12.bid.,47. 13.Hudec and Southwick 1999.72-74. 14.Panagariya 2000,317. 15.See Frankel 1997,112-13;Freund and McLaren 1999:Sapir 2001;and Winters and Chang 2000. 16.See Bhagwati 1993:Bhagwati and Panagariya 1996:Frankel 1997:Panagariya 2000:and Pom- fret 1997.Central to assessing the global welfare implications of a PTA is whether it creates more trade among members than it diverts from efficient producers located outside the arrangement.Viner 1950.However,it should be noted that in addition to this factor,PTAs affect members'welfare by influencing foreign direct investment,the governance of international economic relations,and other issues.See Lawrence 1996;and Yarbrough and Yarbrough 1992. 17.New York Times,19 December 1993,D4

what constitutes compliance+ 9 As a WTO staff member observes, “history has proved this to be one of the most unsatisfactory of all GATT procedures+” 10 Con￾sequently, a former GATT Deputy Director General concluded, “Of all the GATT articles, this @Article XXIV# is one of the most abused+ @New PTA members# have little fear that they will be embarrassed by some GATT body finding them in vi￾olation of their international obligations and commitments and recommending that they abandon or alter what they are about to do+” 11 In fact, GATT0WTO members joining a PTA routinely violate Article XXIV+ Trade barriers within preferential arrangements are almost never completely elim￾inated and members frequently raise trade barriers on nonmembers’ products+ Germany’s average tariff on third parties, for example, nearly doubled after its accession to the European Economic Community in 1958+ 12 To align with the European Union’s ~EU! textile and apparel import regime, Turkey increased its quantitative restrictions against outside states after signing an FTA with the EU in 1995+ 13 Similarly, Mexico, Israel, and the members of the Mercado Común del Cono Sur ~Mercosur! increased their external trade barriers after joining PTAs+ 14 Even preferential groupings whose members have not raised their external trade barriers often inflict some damage on third parties, if for no other reason than because the preferential access granted to members’ products degrades the com￾petitiveness of nonmembers’ products within the PTA+ 15 To be clear, we are not claiming that PTAs generally have been economically harmful+ Although the available evidence indicates that some PTAs—especially those composed of developing countries—have had adverse economic conse￾quences, various studies conclude that other arrangements—particularly those formed in recent years—have promoted economic welfare+ 16 Regardless, the wel￾fare implications of PTAs do not directly bear on the issues addressed here+ Nonetheless, the fact that GATT0WTO has been unable to prevent PTAs from enacting policies that place third parties at a competitive disadvantage in inter￾national markets suggests that, contrary to the view of some observers, GATT0 WTO has not “made the world safe for regionalism+” 17 Rather, we argue that 9+ See Crawford and Laird 2001; Sampson 1996, 90; and WTO 1995a, 63, and 1999a+ 10+ Sampson 1996, 90+ 11+ WTO 1995a, 63+ 12+ Ibid+, 47+ 13+ Hudec and Southwick 1999, 72–74+ 14+ Panagariya 2000, 317+ 15+ See Frankel 1997, 112–13; Freund and McLaren 1999; Sapir 2001; and Winters and Chang 2000+ 16+ See Bhagwati 1993; Bhagwati and Panagariya 1996; Frankel 1997; Panagariya 2000; and Pom￾fret 1997+ Central to assessing the global welfare implications of a PTA is whether it creates more trade among members than it diverts from efficient producers located outside the arrangement+ Viner 1950+ However, it should be noted that in addition to this factor, PTAs affect members’ welfare by influencing foreign direct investment, the governance of international economic relations, and other issues+ See Lawrence 1996; and Yarbrough and Yarbrough 1992+ 17+ New York Times, 19 December 1993, D4+ Multilateral Determinants of Regionalism 833

834 International Organization states form PTAs to ensure the greatest possible gains from the multilateral re- gime itself. How the Multilateral Trade Regime Induces PTA Formation Much research concludes that states form PTAs to obtain the economic gains stem- ming from preferential access to members'markets(although it is worth reiterat- ing that whether states actually benefit from such arrangements remains the subject of substantial controversy).A growing body of literature,however,focuses on the incentives for states to establish PTAs as a means of increasing their bargaining power within the multilateral regime.s We focus on two ways that states entering preferential groupings enhance such power. First,establishing a preferential arrangement can strengthen a state's bargain- ing position vis-a-vis nonmembers by furnishing it with insurance against devel- opments within the multilateral regime that threaten its interests.Developments such as the failure to reach agreement in multilateral trade talks become less costly because the state has already secured open access to its PTA partners'markets. An Australian government official illustrated this point nicely.Speaking about two proposed FTAs,he remarked that "Australia's clout in the WTO talks de- pends on holding the line in our bilateral trade negotiations with Japan [and]the U.S..19 Safeguarding access to crucial overseas markets by forming a PTA is particu- larly useful if the enforcement mechanisms in the multilateral trade regime,de- signed to minimize discrimination and new protectionism,prove weak.20 Under these conditions,a preferential arrangement furnishes members with insurance against the prospect of their key trade partners unilaterally raising trade barriers in the future.Even if GATT/WTO enforcement mechanisms are strong,however, halting progress in achieving multilateral liberalization can stimulate fears of los- ing competitiveness in international markets,especially on the part of smaller states. For instance,at a time when the Uruguay Round had stalled and was threatening to end in failure,an Inter-American Development Bank official declared,"The Caribbean is in danger of becoming a backwater.Small countries will be wiped out unless they integrate."2 Referring to the unsuccessful efforts to jumpstart multi- lateral liberalization at the WTO's 1999 Seattle Ministerial meeting and China's looming accession to the WTO,Singapore's Foreign Minister expressed concerns 18.See,for example,Bhagwati 1993;Bhagwati and Panagariya 1996;Fernandez and Portes 1998; Krueger 1999;Krugman 1993;Ludema 1996;Mansfield 1998;Oye 1992;Perroni and Whalley 2000; and Whalley 1998. 19.Australian,29 April 2002,4. 20.Bagwell and Staiger 2001,321. 21.Journal of Commerce,3 September 1991,5A

states form PTAs to ensure the greatest possible gains from the multilateral re￾gime itself+ How the Multilateral Trade Regime Induces PTA Formation Much research concludes that states form PTAs to obtain the economic gains stem￾ming from preferential access to members’ markets ~although it is worth reiterat￾ing that whether states actually benefit from such arrangements remains the subject of substantial controversy!+ A growing body of literature, however, focuses on the incentives for states to establish PTAs as a means of increasing their bargaining power within the multilateral regime+ 18 We focus on two ways that states entering preferential groupings enhance such power+ First, establishing a preferential arrangement can strengthen a state’s bargain￾ing position vis-à-vis nonmembers by furnishing it with insurance against devel￾opments within the multilateral regime that threaten its interests+ Developments such as the failure to reach agreement in multilateral trade talks become less costly because the state has already secured open access to its PTA partners’ markets+ An Australian government official illustrated this point nicely+ Speaking about two proposed FTAs, he remarked that “Australia’s clout in the WTO talks de￾pends on holding the line in our bilateral trade negotiations with Japan @and# the U+S++++” 19 Safeguarding access to crucial overseas markets by forming a PTA is particu￾larly useful if the enforcement mechanisms in the multilateral trade regime, de￾signed to minimize discrimination and new protectionism, prove weak+ 20 Under these conditions, a preferential arrangement furnishes members with insurance against the prospect of their key trade partners unilaterally raising trade barriers in the future+ Even if GATT0WTO enforcement mechanisms are strong, however, halting progress in achieving multilateral liberalization can stimulate fears of los￾ing competitiveness in international markets, especially on the part of smaller states+ For instance, at a time when the Uruguay Round had stalled and was threatening to end in failure, an Inter-American Development Bank official declared, “The Caribbean is in danger of becoming a backwater+ Small countries will be wiped out unless they integrate+” 21 Referring to the unsuccessful efforts to jumpstart multi￾lateral liberalization at the WTO’s 1999 Seattle Ministerial meeting and China’s looming accession to the WTO, Singapore’s Foreign Minister expressed concerns 18+ See, for example, Bhagwati 1993; Bhagwati and Panagariya 1996; Fernández and Portes 1998; Krueger 1999; Krugman 1993; Ludema 1996; Mansfield 1998; Oye 1992; Perroni and Whalley 2000; and Whalley 1998+ 19+ Australian, 29 April 2002, 4+ 20+ Bagwell and Staiger 2001, 321+ 21+ Journal of Commerce, 3 September 1991, 5A+ 834 International Organization

Multilateral Determinants of Regionalism 835 that Southeast Asia was"being left behind economically while North Asian coun- tries raced ahead."22 By insuring states against the loss of competitiveness in international markets and any future disruption in trade that developments within the multilateral re- gime could precipitate,PTAs promote the bargaining power of their members.The claim that preferential arrangements vest states with insurance against shocks to the international trading system has gained increasing currency in recent years.3 To date,however,no effort has been made to analyze how events within GATT WTO might lead member-states to seek the insurance that PTAs provide.This gap in the literature is surprising because it is widely acknowledged that even the United States has considered using PTAs to help offset the effects of any failures at the multilateral level.24 In 1993,for example,U.S.Trade Representative Mickey Kantor explicitly argued that trade liberalization within the Asia-Pacific Economic Cooperation (APEC)and the proposed Free Trade Agreement of the Americas (FTAA)would be viable means to expand U.S.market access in the event that the Uruguay Round faltered.25 Second,PTAs may also boost bargaining power by giving states a greater voice in international trade forums and enhancing their market power.Many developing countries have considerable difficulty maintaining sufficient expertise on the mul- titude of covered issues and policies to participate effectively in multilateral trade negotiations.In fact,many of them have no delegation at the WTO whatsoever.26 To help resolve these problems,various PTAs pool members'resources to im- prove how they research,articulate,and represent their common interests in trade talks with nonmembers.For example,observers agree that a primary goal of the Caribbean Community and Common Market(CARICOM)was to "strengthen the region's external position through the coordination of member states'[trade]pol- icies."27 Indeed,CARICOM has sometimes negotiated as a group at the WTO.28 Likewise,Prime Minister Said Musa of Belize justified the proposed Central American-Caribbean FTA by saying,"we need to establish a common strategy so that we can obtain special treatment in international trade negotiations."29 Even larger countries have incentives to use PTAs to coordinate on the best ways to pursue their mutual interests vis-a-vis third parties.For instance,Malaysian Prime Minister Mahathir Mohamad's 2002 proposal for an East Asian Economic Group, 22.Financial Times,25 July 2000,10. 23.See Fernandez and Portes 1998;Mansfield 1998;Perroni and Whalley 2000;Whalley 1998; and Yarbrough and Yarbrough 1992. 24.Whalley 1998. 25.Irish Times,29 October 1993,14. 26.See Michalopoulos 1999;and Reinhardt 2002. 27.IADB 2000.31;see also Andriamananjara and Schiff 2001 28.WT02001. 29.James Canute,"Caribbean and Central America Press for Co-Operation,"Financia/Times.Avail- able at (www.ft.com).Accessed 12 February 2002

that Southeast Asia was “being left behind economically while North Asian coun￾tries raced ahead+” 22 By insuring states against the loss of competitiveness in international markets and any future disruption in trade that developments within the multilateral re￾gime could precipitate, PTAs promote the bargaining power of their members+ The claim that preferential arrangements vest states with insurance against shocks to the international trading system has gained increasing currency in recent years+ 23 To date, however, no effort has been made to analyze how events within GATT0 WTO might lead member-states to seek the insurance that PTAs provide+ This gap in the literature is surprising because it is widely acknowledged that even the United States has considered using PTAs to help offset the effects of any failures at the multilateral level+ 24 In 1993, for example, U+S+ Trade Representative Mickey Kantor explicitly argued that trade liberalization within the Asia-Pacific Economic Cooperation ~APEC! and the proposed Free Trade Agreement of the Americas ~FTAA! would be viable means to expand U+S+ market access in the event that the Uruguay Round faltered+ 25 Second, PTAs may also boost bargaining power by giving states a greater voice in international trade forums and enhancing their market power+ Many developing countries have considerable difficulty maintaining sufficient expertise on the mul￾titude of covered issues and policies to participate effectively in multilateral trade negotiations+ In fact, many of them have no delegation at the WTO whatsoever+ 26 To help resolve these problems, various PTAs pool members’ resources to im￾prove how they research, articulate, and represent their common interests in trade talks with nonmembers+ For example, observers agree that a primary goal of the Caribbean Community and Common Market ~CARICOM! was to “strengthen the region’s external position through the coordination of member states’ @trade# pol￾icies+” 27 Indeed, CARICOM has sometimes negotiated as a group at the WTO+ 28 Likewise, Prime Minister Said Musa of Belize justified the proposed Central American-Caribbean FTA by saying, “we need to establish a common strategy so that we can obtain special treatment in international trade negotiations+” 29 Even larger countries have incentives to use PTAs to coordinate on the best ways to pursue their mutual interests vis-à-vis third parties+ For instance, Malaysian Prime Minister Mahathir Mohamad’s 2002 proposal for an East Asian Economic Group, 22+ Financial Times, 25 July 2000, 10+ 23+ See Fernández and Portes 1998; Mansfield 1998; Perroni and Whalley 2000; Whalley 1998; and Yarbrough and Yarbrough 1992+ 24+ Whalley 1998+ 25+ Irish Times, 29 October 1993, 14+ 26+ See Michalopoulos 1999; and Reinhardt 2002+ 27+ IADB 2000, 31; see also Andriamananjara and Schiff 2001+ 28+ WTO 2001+ 29+ James Canute, “Caribbean and Central America Press for Co-Operation,” Financial Times+ Avail￾able at ^www+ft+com&+ Accessed 12 February 2002+ Multilateral Determinants of Regionalism 835

836 International Organization a revival of a Uruguay Round-era plan,was intended to help its potential mem- bers "be more effective in protecting their collective interests."30 Further,PTAs may increase leverage by accumulating the market power of in- dividual members,giving them a greater ability to influence their terms of trade and to negotiate favorable settlements with outsiders.31 On this score,Pascal Lamy-the EU's Commissioner for External Trade-conceded that "consolidat- ing Mercosur will give Brazil and its partners...more political weight in inter- national negotiations."3 Anticipating the formation of Mercosur,a Brazilian official similarly remarked,"Dealing directly with the U.S.on international trade issues is like getting into a cage with a tiger.Only if we have others in with us do we stand a better chance of getting some satisfactory results."33 The ability of a PTA to heighten the market power of members is especially pronounced for states in a customs union-such as the European Community (EC) and Mercosur-because these institutions erect a common external tariff(CET) and thus bargain over tariff levels with third parties as a unit.34 However,states need not form a customs union to enhance their negotiating position.It is widely argued that states have tried to influence the outcome of multilateral negotiations by threatening to form or actually establishing various types of PTAs.35 Further, regardless of whether a PTA imposes a CET,its members accrue bargaining power insofar as the arrangement improves their reversion point in negotiations with third parties and promotes collective action among them.In any case,Rodney Ludema has identified a fairly broad set of conditions under which the external bargaining power of customs unions and other PTAs is quite similar.36 Hence,we focus on PTAs as a group,rather than distinguishing among different types of them,in the following analysis. Central to our argument is that developments within GATT/WTO have influ- enced when member-states have sought the bargaining power offered by PTAs.As we explain below,the existence of a GATT/WTO multilateral negotiating round, fluctuations in its membership,and its mechanisms to settle commercial disputes between members are particularly important in this regard. Multilateral Trade Negotiations Since its creation,GATT/WTO has sponsored eight rounds of MTNs:Geneva (1947),Annecy(1949),Torquay(1950-51),Geneva(1955-56),Dillon(1961-62), 30.Business Times (Malaysia),23 May 2002,2. 31.See Fernandez and Portes 1998,201;Krugman 1993,73;Lawrence 1996,37;and Oye 1992. 32.European Commission,Trade DG,Information Unit,10 July 2001. 33.Financial Times,2 July 1985,5.See also Lawrence 1996,37. 34.However,FTAs routinely level asymmetries in external tariffs using rules of origin.WTO 1995a, 48-49. 35.See Fernandez and Portes 1998;Krueger 1999;and Whalley 1998. 36.Ludema 1996

a revival of a Uruguay Round-era plan, was intended to help its potential mem￾bers “be more effective in protecting their collective interests+” 30 Further, PTAs may increase leverage by accumulating the market power of in￾dividual members, giving them a greater ability to influence their terms of trade and to negotiate favorable settlements with outsiders+ 31 On this score, Pascal Lamy—the EU’s Commissioner for External Trade—conceded that “consolidat￾ing Mercosur will give Brazil and its partners +++ more political weight in inter￾national negotiations+” 32 Anticipating the formation of Mercosur, a Brazilian official similarly remarked, “Dealing directly with the U+S+ on international trade issues is like getting into a cage with a tiger+ Only if we have others in with us do we stand a better chance of getting some satisfactory results+” 33 The ability of a PTA to heighten the market power of members is especially pronounced for states in a customs union—such as the European Community ~EC! and Mercosur—because these institutions erect a common external tariff ~CET! and thus bargain over tariff levels with third parties as a unit+ 34 However, states need not form a customs union to enhance their negotiating position+ It is widely argued that states have tried to influence the outcome of multilateral negotiations by threatening to form or actually establishing various types of PTAs+ 35 Further, regardless of whether a PTA imposes a CET, its members accrue bargaining power insofar as the arrangement improves their reversion point in negotiations with third parties and promotes collective action among them+ In any case, Rodney Ludema has identified a fairly broad set of conditions under which the external bargaining power of customs unions and other PTAs is quite similar+ 36 Hence, we focus on PTAs as a group, rather than distinguishing among different types of them, in the following analysis+ Central to our argument is that developments within GATT0WTO have influ￾enced when member-states have sought the bargaining power offered by PTAs+ As we explain below, the existence of a GATT0WTO multilateral negotiating round, fluctuations in its membership, and its mechanisms to settle commercial disputes between members are particularly important in this regard+ Multilateral Trade Negotiations Since its creation, GATT0WTO has sponsored eight rounds of MTNs: Geneva ~1947!, Annecy ~1949!, Torquay ~1950–51!, Geneva ~1955–56!, Dillon ~1961–62!, 30+ Business Times (Malaysia), 23 May 2002, 2+ 31+ See Fernández and Portes 1998, 201; Krugman 1993, 73; Lawrence 1996, 37; and Oye 1992+ 32+ European Commission, Trade DG, Information Unit, 10 July 2001+ 33+ Financial Times, 2 July 1985, 5+ See also Lawrence 1996, 37+ 34+ However, FTAs routinely level asymmetries in external tariffs using rules of origin+ WTO 1995a, 48–49+ 35+ See Fernández and Portes 1998; Krueger 1999; and Whalley 1998+ 36+ Ludema 1996+ 836 International Organization

Multilateral Determinants of Regionalism 837 Kennedy (1963-67),Tokyo (1973-79),and Uruguay (1986-94),plus the Doha Development Agenda,launched in November 2001.Participants in MTNs that enter a PTA may be able to strengthen their bargaining position in these nego- tiations.37 Heightened market power enhances the ability of members to use pro- tectionist instruments to improve their terms of trade,thereby dampening their incentive to liberalize trade and bolstering their bargaining position in multilateral negotiations.38 Further,by vesting each member with preferential access to the markets of other participants,PTAs can help firms in member-states to achieve economies of scale.States entering a preferential grouping thus face a reduced need for multilateral liberalization to generate such economies,bolstering their leverage in multilateral negotiations.3 In this vein,it is noteworthy that the defin- itive accounting shows that countries such as Bolivia,India,Australia,South Africa,and Ecuador were granted significantly fewer Uruguay Round market access concessions than,respectively,Uruguay,Brazil,Austria,Turkey,and Honduras.40 At the time,the latter five countries were members of more preferen- tial arrangements than the former five,suggesting that participation in these arrangements did indeed increase their bargaining power in the Uruguay Round. If PTAs boost bargaining power in MTNs,as this illustrative evidence suggests, then MTNs should provide an impetus for states to enter PTAs. Moreover,by forming a PTA with key trade partners during a multilateral ne- gotiating round,parties to GATT/WTO can obtain insurance against the round stalling or failing to produce results in the specific areas they deem most impor- tant.41 A deadlocked MTN would place pressure on the multilateral regime and could threaten the stability of commercial relations between important trade part- ners.Such partners can minimize the severity of this threat by entering a PTA, because the grouping liberalizes commerce among members and limits their abil- ity to raise trade barriers in the future.In addition,entering a PTA helps a state attract foreign investment:overseas firms are often drawn to the expanded market access offered by preferential groupings,especially when the outcome of multilat- eral talks is uncertain or delayed. Although each of the eight MTNs sponsored by GATT/WTO yielded accords that liberalized global trade,nearly every MTN has been marked by intense dis- agreement while being fashioned.Ministers and observers often asserted that the round was in a state of crisis and teetering on the brink of failure until the final text was inked.The desire for insurance and bargaining power more generally is thus paramount throughout an MTN.We therefore hypothesize that PTAs are more likely to form during an MTN than when no such negotiation is underway. 37.See Bhagwati and Panagariya 1996;and Whalley 1998. 38.See Mansfield 1998,527;and Oye 1992. 39.See Bhagwati 1993;and Fernandez and Portes 1998,201-2. 40.Finger,Ingco,and Reincke 1996,201. 41.See Fernandez and Portes 1998.212:Krugman 1993,74:Mansfield 1998,535-36;Perroni and Whalley 2000;Whalley 1998;and WTO 1995a,52

Kennedy ~1963–67!, Tokyo ~1973–79!, and Uruguay ~1986–94!, plus the Doha Development Agenda, launched in November 2001+ Participants in MTNs that enter a PTA may be able to strengthen their bargaining position in these nego￾tiations+ 37 Heightened market power enhances the ability of members to use pro￾tectionist instruments to improve their terms of trade, thereby dampening their incentive to liberalize trade and bolstering their bargaining position in multilateral negotiations+ 38 Further, by vesting each member with preferential access to the markets of other participants, PTAs can help firms in member-states to achieve economies of scale+ States entering a preferential grouping thus face a reduced need for multilateral liberalization to generate such economies, bolstering their leverage in multilateral negotiations+ 39 In this vein, it is noteworthy that the defin￾itive accounting shows that countries such as Bolivia, India, Australia, South Africa, and Ecuador were granted significantly fewer Uruguay Round market access concessions than, respectively, Uruguay, Brazil, Austria, Turkey, and Honduras+ 40 At the time, the latter five countries were members of more preferen￾tial arrangements than the former five, suggesting that participation in these arrangements did indeed increase their bargaining power in the Uruguay Round+ If PTAs boost bargaining power in MTNs, as this illustrative evidence suggests, then MTNs should provide an impetus for states to enter PTAs+ Moreover, by forming a PTA with key trade partners during a multilateral ne￾gotiating round, parties to GATT0WTO can obtain insurance against the round stalling or failing to produce results in the specific areas they deem most impor￾tant+ 41 A deadlocked MTN would place pressure on the multilateral regime and could threaten the stability of commercial relations between important trade part￾ners+ Such partners can minimize the severity of this threat by entering a PTA, because the grouping liberalizes commerce among members and limits their abil￾ity to raise trade barriers in the future+ In addition, entering a PTA helps a state attract foreign investment: overseas firms are often drawn to the expanded market access offered by preferential groupings, especially when the outcome of multilat￾eral talks is uncertain or delayed+ Although each of the eight MTNs sponsored by GATT0WTO yielded accords that liberalized global trade, nearly every MTN has been marked by intense dis￾agreement while being fashioned+ Ministers and observers often asserted that the round was in a state of crisis and teetering on the brink of failure until the final text was inked+ The desire for insurance and bargaining power more generally is thus paramount throughout an MTN+ We therefore hypothesize that PTAs are more likely to form during an MTN than when no such negotiation is underway+ 37+ See Bhagwati and Panagariya 1996; and Whalley 1998+ 38+ See Mansfield 1998, 527; and Oye 1992+ 39+ See Bhagwati 1993; and Fernández and Portes 1998, 201–2+ 40+ Finger, Ingco, and Reincke 1996, 201+ 41+ See Fernández and Portes 1998, 212; Krugman 1993, 74; Mansfield 1998, 535–36; Perroni and Whalley 2000; Whalley 1998; and WTO 1995a, 52+ Multilateral Determinants of Regionalism 837

838 International Organization Anecdotal evidence is consistent with this hypothesis.The WTO,for example, officially attributed the wave of regionalism during the past decade to events in the Uruguay Round,such as the failed Brussels Ministerial meeting in December 1990.42 In the same vein,economic ministers of the Association of Southeast Asian Nations(ASEAN)launched an FTA in 1993,an initiative that was widely viewed as "a sign [of]...concern about the inability to achieve a successful conclusion to the Uruguay Round.4 Equally,many observers point to the stalled multilat- eral negotiations as a critical catalyst for the U.S.-Canada FTA,arguing that the United States conceived of this arrangement as "a prod to recalcitrant nations to join in the GATT effort to make sure they weren't cut out of the action."44 More recently,the United States has proposed an extensive series of bilateral trade ac- cords,with the explicit purpose of leveraging more concessions from nonmem- bers during the Doha round of WTO talks.45 Growing GATT/WTO Membership Membership in GATT/WTO has grown more than sixfold since its inception,from twenty-two states in 1948 to 137 in 2000.46 It is widely recognized that as the multilateral system adds members,each member's leverage declines.47 Especially for smaller states,which have relatively little bargaining power to begin with,there are clear incentives to respond to a decrease in leverage by banding together to enhance their influence through the formation of a PTA.Consistent with this hy- pothesis,a number of formal models have shown that rising GATT/WTO mem- bership decreases the leverage of each participant and stimulates the establishment of preferential groupings.To date,however,this issue has not received much systematic empirical scrutiny. There are a number of related reasons to expect growth in the size of GATT WTO to precipitate PTA formation.As the number of parties to the multilateral regime has increased,so have the severity of collective action problems and the heterogeneity of preferences within the institution.4An expanded membership re- duces each participant's ability to monitor the trade practices of its counterparts. States also face rising incentives to cheat:because the actions of any single mem- 42.See Dryden1995,370;and WT01995a,54. 43.Far Eastern Economic Review,5 November 1992,50. 44.Dryden 1995,340;see also Preeg 1995,80. 45.For example,upon the completion of the U.S.-Singapore FTA negotiations,U.S.Trade Repre- sentative Robert Zoellick declared,"I firmly believe that a process of...competitive liberalization will enhance our ability to get Doha done."See Washington Post,20 November 2002,E3:and Finan- cial Times,I November 2002,14. 46.Chile signed the 1947 GATT agreement but did not accede formally until 1949.WTO 1995b, 1136. 47.See,for example,Koremenos,Lipson,and Snidal 2001,791-92;and McCalman 2002,154. 48.See Freund 2000,373-74:and McCalman 2002,154. 49.See Fernandez and Portes 1998,205;and Krugman 1993,74

Anecdotal evidence is consistent with this hypothesis+ The WTO, for example, officially attributed the wave of regionalism during the past decade to events in the Uruguay Round, such as the failed Brussels Ministerial meeting in December 1990+ 42 In the same vein, economic ministers of the Association of Southeast Asian Nations ~ASEAN! launched an FTA in 1993, an initiative that was widely viewed as “a sign @of# +++ concern about the inability to achieve a successful conclusion to the Uruguay Round+” 43 Equally, many observers point to the stalled multilat￾eral negotiations as a critical catalyst for the U+S+-Canada FTA, arguing that the United States conceived of this arrangement as “a prod to recalcitrant nations to join in the GATT effort to make sure they weren’t cut out of the action+” 44 More recently, the United States has proposed an extensive series of bilateral trade ac￾cords, with the explicit purpose of leveraging more concessions from nonmem￾bers during the Doha round of WTO talks+ 45 Growing GATT/WTO Membership Membership in GATT0WTO has grown more than sixfold since its inception, from twenty-two states in 1948 to 137 in 2000+ 46 It is widely recognized that as the multilateral system adds members, each member’s leverage declines+ 47 Especially for smaller states, which have relatively little bargaining power to begin with, there are clear incentives to respond to a decrease in leverage by banding together to enhance their influence through the formation of a PTA+ Consistent with this hy￾pothesis, a number of formal models have shown that rising GATT0WTO mem￾bership decreases the leverage of each participant and stimulates the establishment of preferential groupings+ 48 To date, however, this issue has not received much systematic empirical scrutiny+ There are a number of related reasons to expect growth in the size of GATT0 WTO to precipitate PTA formation+ As the number of parties to the multilateral regime has increased, so have the severity of collective action problems and the heterogeneity of preferences within the institution+ 49 An expanded membership re￾duces each participant’s ability to monitor the trade practices of its counterparts+ States also face rising incentives to cheat: because the actions of any single mem- 42+ See Dryden 1995, 370; and WTO 1995a, 54+ 43+ Far Eastern Economic Review, 5 November 1992, 50+ 44+ Dryden 1995, 340; see also Preeg 1995, 80+ 45+ For example, upon the completion of the U+S+-Singapore FTA negotiations, U+S+ Trade Repre￾sentative Robert Zoellick declared, “I firmly believe that a process of +++ competitive liberalization will enhance our ability to get Doha done+” See Washington Post, 20 November 2002, E3; and Finan￾cial Times, 1 November 2002, 14+ 46+ Chile signed the 1947 GATT agreement but did not accede formally until 1949+ WTO 1995b, 1136+ 47+ See, for example, Koremenos, Lipson, and Snidal 2001, 791–92; and McCalman 2002, 154+ 48+ See Freund 2000, 373–74; and McCalman 2002, 154+ 49+ See Fernández and Portes 1998, 205; and Krugman 1993, 74+ 838 International Organization