Is Bilateralism Bad

TLDR

Trade liberalization in the 1980s shifted from multilateral negotiations to bilateral and regional agreements, raising concerns that such local deals could undermine the multilateral process and reduce global trade and welfare. The study develops a simple model to assess how consolidating the world into fewer regional trading blocs might affect overall welfare. The model examines the welfare outcomes of regional blocs, assuming each bloc maximizes its members’ welfare. The analysis shows that, for all plausible parameters, global welfare is minimized when there are three blocs, and even more complex versions of the model still support concerns about bilateral and regional trade deals.

Abstract

In the 1980s the process of trade liberalization through multilateral negotiation seems to have run aground. In its place there have been a number of bilateral and regional moves toward liberalization. Some have been concerned that these local deals may, by undermining the multilateral process, actually reduce world trade and welfare. This paper develops a simple model of the effects of regional trading blocs, and shows that consolidation of the world into a smaller number of such blocs may indeed reduce welfare, even when each bloc acts to maximize the welfare of its members. Indeed, for all plausible parameter values world welfare is minimized when there are three trading blocs. More complex versions of the model offer softer results, but the main thrust is still to validate concern over the effects of bilateral and regional trade deals.