A Study on Regional Trade Agreements

Abstract

Resources flowing to their most efficient uses and reduced commodity costs are the root of benefits from such increased access to trade. With preferential liberalization, however, these regular trade liberalization benefits are not assured. The consequences of welfare depend on whether commerce is mostly expanded at the expense of non-members. In addition, there are fears that the movement towards regionalism could have negative long-term consequences on the liberalization of foreign markets and the multilateral trading mechanism. Discrimination and the opportunity for deviation from commerce are at the forefront of the discussion. The transfer of supply from productive foreign vendors to inefficient participants is a trade diversion. Trade development, on the other hand, is the transfer of supply from inefficient domestic suppliers to productive representatives of the RTA. While the production of exchange is related to normal trade benefits, trade diversion will make a trade deal unfavorable to both members and non-members. The extent of the diversion impacts the feasibility of the ex-ante deal and the ex-post foreign exchange policies.