1992 Reports

Strategies for Trade Liberalization in the Americas: A Report to ECLAC

Chichilnisky, Graciela

The formation of trading blocks can help or hinder the global liberalization of trade. A determining factor is whether trade within the block is organized around traditional comparative advantages, or around economies of scale. The issue is of particular importance for NAFTA, and for a potential American free trade zone. Regional free trade agreements such as NAFTA can be either complements to, or substitutes for, the GATT negotiations. They are substitutes when the regional agreements are based on traditional comparative advantages, with each regional market developing market power and the corresponding economic incentives to impose tariffs on the rest of the world. Alternatively, regional trade agreements can be complementary to global trade negotiations. This occurs when the trading blocks lead to trade based on the exploitation of economies of scale, rather than to trade based on traditional comparative advantage. Economies of scale produce incentives for expanded trade, and these can defeat the usual "optimal tariff" incentives to impose tariffs and restrict trade. Economies of scale can also mitigate another negative feature of trading blocks: their tendency to divert trade from efficient to inefficient sources. The emergence of regional blocks organized around economies of scale can thus lead to increasingly open international markets. We discuss policy implications for free trade in the Americas.