Media Center



December 1, 1995 - Washington, DC

"If the old closed regionalism" prevails, we will probably witness a very conflicted relationship between the process of global trade liberalization and the increasingly stronger integration arrangements. However, if open regionalism" prospers and guides the efforts to achieve freer regional trade, then integration will be a catalytic force for global free trade."

The future of free trade is at a turning point. On one hand, there are those who argue very persuasively that the world is moving rapidly towards greater freedom in commerce. At the same time, others are claiming with equally effectively that we are witnessing a rapid return to closed economies and rampant protectionism.

The prevalence of both arguments suggests that although we have made significant progress in constructing a liberal international trade order, it is not enough to guarantee its long term viability. The way in which we manage the domestic and international political debate on trade, in the coming months and years, will be decisive in tilting the scales one way or another.

The subject of this panel discussion, regional versus global options, are at the core of that debate. Is regional integration in conflict with global trade liberalization ? Are costums unions and trade-liberalization arrangements a step forward or, on the contrary, are they really road-blocks along our journey toward a truly global market?

To start our discussion let me first dispel a confusion that often arises whenever trade globalization and regional integration are discussed. There is not one brand of regional integration. In fact, there are several approaches with many variations of liberalization as it is applied at the bilateral and regional levels. Each approach has completly different implications for global trade.

To facilitate the discussion, I would argue that the different schemes can be classified into two general categories. On one hand, we have the old" integration approach. This concept, inspired by Keynesian and mercantilistic economics, consideres trade as an instrument in the toolbox of development policies that can be managed, in combination with centralized planning, to acquire the benefits of greater employment and a positive balance of payments.

Imports, according to this theory, are perceived as a necessary evil; competition is synonimous with chaos; and, liberalization is a carefully calibrated quid-pro-quo. This approach leads to what we call closed regionalism" in which a group of countries gradually open certain sectors to managed competition among themselves while increasing barriers with the rest of the world. For this school of thought, trade is a zero-sum game.

In the last decade, a combination of breakthroughs in economic thinking and hard-learned practical lessons have led to a new paradigm" for trade policy and integration. The failure of Keynesianism to deliver on its promise of prosperity and stability effectively opened the doors for the revival of free-market theories and more orthodox policies. In this environment, the rediscovery of the role of market forces has lead to a new way of looking at international trade.

The new style" of integration sees free trade as an essential organizing principle for the economy. Free trade enables an economy to be more efficient and productive. International competition invites innovation and more effective allocation of resources. Wider and more open markets foster greater competitiveness among economies and among companies as well. And probably most importantly, the open flow of goods and services guarantees lower prices and a satisfied consumer. In the final analysis, trade is a positive-sum game for the followers of this theory.

Pursuant to this set of beliefs, a different approach to integration emerged. Open regionalism" sees liberalization and trade agreements as steppingstones toward the ultimate goal of global free trade. Through open integration, without increasing barriers vis-a-vis third parties, many countries are dismantling long-standing protectionist obstacles to regional and bilateral trade as well as uncovering latent complementarities and strong synergies between neighboring economies.

A good example of this approach is what is happening in Latin America. More than 26 liberalization agreements have been signed in the last few years leading to a spectacular growth of intra-regional trade. At the same time, almost all the nations of the region have embraced GATT, the Uruguay Round and joined the WTO. It seems that in our Hemisphere we are achieving the right mixture of regionalism and internationalism in trade matters.

Having reviewed the issue of regional integration, I believe we have some of the necessary elements to respond to this morning central question of regionalism versus globalism. Will trade liberalization at the global level be reinforced or undermined by regional integration agreements ? Well, from what we have seen until now, the answer seems to be strikingly simple. It depends on which type of regionalism we are talking about.

If the old closed regionalism" prevails, then we will probably witness a very conflicted relationship between the process of global trade liberalization and the increasingly stronger integration arrangements. However, if open regionalism" prospers and guides the efforts to achieve freer regional trade, then integration will be a catalytic force for global free trade. However, the ultimate direction of regional integration will depend on at least the following three factors.

First, the WTO system must be able to enforce the Uruguay Round commitments, particularlly among the largest players. If the WTO is able to show real strength in resolving trade disputes and possesses the necessary stamina to redress discriminatory practices by the largest partners, then many other countries will trust the new global-wise trading system. Therefore, it is incumbent upon the WTO to devote as much energy to securing the credibility and enforceability of existing commitments as it is dedicating to opening new negociations.

Nurturing faith in a fair and effective global trading system is critical to warrantee that regional integration arrangements will be enthusiastic participants in our quest for international trade liberalization. If the whole is not greater than the sum of its parts, then there will be no incentive to abandon the comfort and the security of a closed regional trade environment. In fact, perceptions of inefficacy or unfairness at the global level will create a kind of fortress mentality" and encourage self-centered trading blocks.

The degree of openess of the existing trading blocks is the second critical factor likely to encourage a transition from regionalism to globaliberalization. If regionalism is synonymous with exclusion, you can be sure that the newest converts of open market economies will revert quickly to restrictive practices and managed trade. Likewise, if the world trade is going to be defined by members-only" clubs, a global open economy will not develop.

The discussions currently taking place in relation to a Hemispheric-wide agreement in the Americas, the talks between MERCOSUR and NAFTA, MERCOSUR and the European Union, the European Union and NAFTA, APEC and the U.S. and between the European Union and the East European countries, all seem to suggest that the key players are aware of the risks of pemanently and definitively denying access to their trade arrangements.

The third critical factor likely to promote convergence between regional integration and global liberalization will be the extent to which the "post-Uruguay round" trade agenda is balanced in terms of interests and issues. The industrialized countries are pushing the debate and the negotiations towards what has been called the new themes", such as intelectual property, trade in services, competition practices, standards, labor, competitive practices, environmental standards and so on.

On the other hand, newly industrialized countries and less developed nations have a very different set of priorities. Their concerns are more traditional, and focus on unresolved problems regarding market access, unjustified protection and subsidies for agriculture and politically sensitive industries. Should such a dichotomy persist between the two sides, the result will be a bifurcated approach to next round of negociations. And that will be a recipe for disaster.

Finally, let me address the process of trade liberalization in the Americas. Today, in the Americas we have a web of agreements, such as MERCOSUR, the Andean Pact, G-3, many bilateral understandings, and even NAFTA, and at least eight more are being discussed. And at the same time almost every Latin American country is bound by the global commitments achieved at the Uruguay Round. And as if that were not enough, we also have the mandate from the Summit of the Americas that set the year 2005 as the date to create a hemispheric-wide free trade area.

Giving these circumstances, the obvios question is wether this seemingly excesive network of trade arrangements is a contribution or an obstacle to trade liberalization ? A detailed comparative analysis, done by the new Trade Unit of the OAS, suggests that, in general, the different agreements are compatible with GATT and have a technical proclivity towards harmonization and convergence. Therefore, from a formal perspective, the different agreements in the Hemisphere are inclined towards a broader liberalization of trade.

This is important because, at the political level, we are fast approaching a decisive moment. The countries and the different integration agreements of Latin America are confronted with three basic choices. First, they can follow the path of convergence on a wider regional scheme, probably under the leadership of MERCOSUR; second, they can apply for accession to NAFTA; and third, all the countries and agreements can collectively build a Hemispheric-wide free trade zone. The most desirable outcome is the third option because of its ability to offer a bigger market; promote a more transparent environment; and reduce diversion of investment and trade flows.

However, it is possible that the different agreements and countries will innitially migrate towards either NAFTA or MERCOSUR, thus creating two clusters, one in North America and the other in the Southern Cone. In effect, the two clusters would exist during a transitional period leading up to a Hemispheric-wide free-trade agreement.

Furthermomre, the results of the Trade Ministerial meeting in Denver, at the beginning of this Summer, strongly suggests that such a clustering" of bilateral and sub-regional agreements would in fact be shaped by a genuine desire to advance ultimately towards a Free Trade Agreement of the Americas. It is also worth noting that ongoing informal discussions between Brazil and the U.S. and between NAFTA and MERCOSUR tend to reinforce this conclusion.

Therefore, the challenge for the next decade will be to guarantee the continuity of the liberalization process in Latin America and do it in such a way that it does not become either discriminatory or incompatible with the efforts to expand global trade.

In conclusion, I believe that regional integration is totaly compatible with an open and liberal global economic order. But, such an international trade system must be fair, and it must preserve and strengthen the faith of all the partners in the benefits of free markets. However, as I suggested earlier, we have yet to demostrate that the whole is greater than the sum of its parts.