Regionalization of World Trade and Currencies

Jeffrey A. Frankel and Shang-Jin Wei

in The Regionalization of the World Economy

Published by University of Chicago Press

Published in print November 1997 | ISBN: 9780226259956
Published online February 2013 | e-ISBN: 9780226260228 | DOI:
Regionalization of World Trade and Currencies

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Drawing on earlier econometric results, this chapter explores the effects that regional economic arrangements concerning currencies have had on bilateral trade. It considers economic welfare effects of regional arrangements but relaxes the assumption that tariffs maintained by members of free trade areas against outsiders are exogenously set. The chapter also reviews various political economy arguments that others have made regarding how regional initiatives might either undermine movement toward more general trade liberalization, or help build political support for it. It presents a simple model that illustrates one possible beneficial effect of trade blocs as a political building block to further liberalization. It returns to the gravity model estimates to make a tentative assessment on which of the contrasting political-economy effects of trade regionalization, favorable or unfavorable, are likely to dominate. It shows that those groupings, such as the European Community and East Asia, that have increased trade disproportionately with each other, have at the same time increased trade with non-members.

Keywords: trade regionalization; political economy; trade liberalization; bilateral trade; economic welfare; tariffs; free trade areas; trade blocs; gravity model; currencies

Chapter.  17480 words. 

Subjects: International Economics

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