APPENDIX Economic Effects of Creating a Trading Bloc
Suppose two countries A (poorer) and B (richer) form a trade bloc. They can import from the rest of the world (W) which faces zero marginal costs to supply the bloc, i.e., a horizontal supply curve, SW. Country B has an upward slopping supply curve, SB. If A imposes import tariff t on all countries, this has the effect of moving the supply curves upwards for both suppliers by the amount of the tax. At the equilibrium point E, the supply is HG from B and GE from W. If the tariff is removed for B, B can supply an additional GF (or Q1Q2), thereby leading to a trade diversion. Under constant marginal costs for W, country A suffers from tariff loss, without a commensurate gain in consumer surplus. Gunning argues that most trade blocs, e.g., those in Africa, are pursued mostly for political reasons, and that it is usually more economically beneficial to undertake a unilateral lowering of tariffs.
The question that arises is whether there is a case for a South-South regional trade area (RTA). Are RTAs a distraction from the more economically desirable multilateral trade agreements? Schiff (2002) argues that in general, it is best for RTAs to sign agreements with bigger countries or blocs in order to fully benefit from the benefits of integration. He does point to a number of advantages of RTAs. First, in the area of regional public goods (security, transportation, the environment), it makes sense to have regional cooperation. Second, an RTA is better able to negotiate with bigger countries or other RTAs by pooling their resources.
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