Economic Regionalism:Evidence from Two 20th Century Episodes BARRY EICHENGREEN and JEFFREY A.FRANKEL ABSTRACT This paper analyzes two types of evidence on the economics and politics of regional commercial relations in the 1930s and 1990s:statistical and political.Our statistical analysis uncovers a tendency toward regionalism in both the 1930s and 1990s.At the same time,our political analysis suggests that the parallels should not be pushed too far. In the 1930s,the regionalization of trade was sometimes an attempt to discourage mul- tilateral transactions and other times a response to the collapse of the multilateral sys- tem.In the 1980s,in contrast,regionalism has been a device for overcoming entrenched resistance to multilateral liberalization and for building coalitions favoring liberaliza- tion over still wider areas. INTRODUCTION Observers of economic trends cannot agree on whether growing regionalism is a fact,much less on its economic and political significance.They agree that an increasing share of the trade of Western Europe and East Asia stays within those regions.The United States is still Japan's largest export market,however,and the European Union(EU)remains the single most important destination of American exports.Even where the disproportionate growth of intra-regional trade is clear,there is dispute about whether this trend reflects the rela- tively rapid growth of incomes (in Asia)and market liberalization permitting the natural determinants of trade to reassert themselves (in Europe)or the manipulation of economic relationships by governments.The most important international monetary innovation of recent years-the European Monetary System-is a regional initiative,but its financial corollary,the removal of capital controls,has increased financial interdependence globally rather than simply regionally.It is far from clear,in other words,that international mone- tary relations are evolving into a world of currency blocs.Japan may be the leading source of foreign investment in East Asia,and Germany in Eastern Europe,but the United States invests in both regions,and Germany and Japan invest heavily in North America.Here, too,there is disagreement about whether intra-regional investments flow naturally from the economic advantages of proximity or reflect the efforts of governments to promote regional self-sufficiency. These different interpretations are important because they have different implications for the future of the international system.Those for whom the growth of intra-regional trade and investment is a mere concommitant of economic liberalization-the reassertion of natural economic relationships-perceive no threat to the global commercial and finan- Barry Eichengreen and Jeffrey A.Frankel.Department of Economics.549 Evans Hall #3880.University of California at Berkeley,Berkeley,CA 94720-3880. North American Journal of Economics Finance 6(2):89-106 Copyright 1995 by JAI Press Inc. ISSN1062-9408 All rights of reproduction in any form reserved
Economic Regionalism: Evidence from Two 20th Century Episodes BARRY EICHENGREEN and JEFFREY A. FRANKEL ABSTRACT This paper economics and politics of regional commercial relations political. Our statistical analysis uncovers a tendency toward regionalism in both the 1930s and 1990s. At the same time, our analysis suggests that the should not be pushed too far. In the 193Os, the regionalization sometimes an attempt to discourage tilateral transactions contrast, regionalism has been a device for overcoming entrenched resistance to multilateral liberalization and for building coalitions Observers of economic trends cannot agree on whether growing regionalism is a fact, much less on its economic and political significance. They agree that an increasing share of the trade of Western Europe and East Asia stays within those regions. The United States is still Japan’s largest export market, however, and the European Union (EU) remains the single most important destination of American exports. Even where the disproportionate growth of intra-regional trade is clear, there is dispute about whether this trend reflects the relatively rapid growth of incomes (in Asia) and market liberalization permitting the natural determinants of trade to reassert themselves (in Europe) or the manipulation of economic relationships by governments. The most important international monetary innovation of recent years-the European Monetary System-is a regional initiative, but its financial corollary, the removal of capital controls, has increased financial interdependence globally rather than simply regionally. It is far from clear, in other words, that international monetary relations are evolving into a world of currency blocs. Japan may be the leading source of foreign investment in East Asia, and Germany in Eastern Europe, but the United States invests in both regions, and Germany and Japan invest heavily in North America. Here, too, there is disagreement about whether intra-regional investments flow naturally from the economic advantages of proximity or reflect the efforts of governments to promote regional self-sufficiency. These different interpretations are important because they have different implications for the future of the international system. Those for whom the growth of intra-regional trade and investment is a mere concommitant of economic liberalization-the reassertion of natural economic relationships-perceive no threat to the global commercial and finanBarry Eichengreen and Jeffrey A. Fmnkel l Department of Economics, 549 Evans Hall #3880, University of California at Berkeley, Berkeley, CA 94720-3880. North American Journal of Economics & Finance 6(2): 89-106 Copyright 0 1995 by JAI Press Inc. ISSN 1062-9408 All rights of reproduction in any form reserved
90 EICHENGREEN and FRANKEL cial system.There need be no conflict between regionalism and multilateralism in this view.Those for whom the growth of intra-regional trade and investment links and exchange-rate stabilization at the regional level reflects the efforts of governments to achieve national political objectives warn,in contrast,that the multilateral system may be in jeopardy. Our goals in this paper are to establish what has happened and analyze what it means. Both tasks are harder than they may seem.The redirection of trade and financial flows is readily documented,but the reasons for this redirection are not.Systematizing the evidence requires a theoretical and empirical framework to structure the analysis.We use multiple regression and the gravity model of international trade.The implications of our findings for the future are even more difficult to assess,since we possess neither models of the political and economic ramifications akin to the gravity model nor consensus forecasts of the inde- pendent variables.Here,we employ the last historical episode of economic and political regionalism-namely,the 1930s-as a metric with which possible implications can be gauged;in other words,as a way of drawing systematic comparisons.We conclude that the dynamics of regionalism have been different in the two periods,implying different eco- nomic and political consequences. WHAT HAS HAPPENED The Postwar Years Table 1 presents statistics on the intra-regional share of the trade of the members of the European Union,EFTA,the East Asian countries,the Western Hemisphere,NAFTA, Asia-Pacific Economic Cooperation(APEC),MERCOSUR,and the Andean Group coun- tries.Intra-regional trade shares (denoted "Ratio 1")increased between 1965 and 1990 from 45%to 53%among the APEC countries,from 1%to 3%among the Andean coun tries,from 36%to 47%among the members of the EU,and from 20%to 30%among the East Asian countries. On the basis of statistics like Ratio 1,it might be argued that world trade is becoming more regionalized.That the share of intra-regional trade is increasing,however,need not mean that the members of this grouping are undertaking discriminatory trade policy mea- sures to bring this about (or even the indirect measures that Japan is charged with employ- ing to the same end,such as overseas development assistance and direct foreign investment).The growth of intra-regional trade could be a natural result of rapid growth in per capita incomes.A typical East Asian country trades more with another typical East Asian country than it did 20 years ago,partly for the same reason that a typical country anywhere in the world does:the East Asian countries have grown richer and loom larger in the world economy (see Frankel 1993). A simple way of adjusting a grouping's intra-regional trade share for the growth of mar- kets is to divide it by that region's share of global trade.We denote this statistic as"Ratio 2."It is apparent that East Asia's bias toward intra-regional trade did not,in fact,increase over the period 1965-1980.For APEC,the Western Hemisphere,the EU,and most of the other groupings,in contrast,there was by this measure a discernible trend toward greater intra-regional trade. A more systematic way of adjusting for the natural determinants of trade is by means of the gravity model.The assumptions of the model are that trade between two countries is proportionate to the product of their GNPs and the product of their per capita GNPs,an
EICHENGREEN and FRANKEL cial system. There need be no conflict between regionalism and multilateralism in this view. Those for whom the growth of intra-regional trade and investment links and exchange-rate stabilization at the regional level reflects the efforts of governments to achieve national political objectives warn, in contrast, that the multilateral system may be in jeopardy. Our goals in this paper are to establish what has happened and analyze what it means. Both tasks are harder than they may seem. The redirection of trade and financial flows is readily documented, but the reasons for this redirection are not. Systematizing the evidence requires a theoretical and empirical framework to structure the analysis. We use multiple regression and the gravity model of international trade. The implications of our findings for the future are even more difficult to assess, since we possess neither models of the political and economic ramifications akin to the gravity model nor consensus forecasts of the independent variables. Here, we employ the last historical episode of economic and political regionalism-namely, the 193Os-as a metric with which possible implications can be gauged; in other words, as a way of drawing systematic comparisons. We conclude that the dynamics of regionalism have been different in the two periods, implying different economic and political consequences. WHAT HAS HAPPENED The Postwar Years Table 1 presents statistics on the intra-regional share of the trade of the members of the European Union, EFTA, the East Asian countries, the Western Hemisphere, NAFTA, Asia-Pacific Economic Cooperation (APEC), MERCOSUR, and the Andean Group countries. In&a-regional trade shares (denoted “Ratio 1”) increased between 1965 and 1990 from 45% to 53% among the APEC countries, from 1% to 3% among the Andean countries, from 36% to 47% among the members of the EU, and from 20% to 30% among the East Asian countries. On the basis of statistics like Ratio 1, it might be argued that world trade is becoming more regionalized. That the share of it&a-regional trade is increasing, however, need not mean that the members of this grouping are undertaking discriminatory trade policy measures to bring this about (or even the indirect measures that Japan is charged with employing to the same end, such as overseas development assistance and direct foreign investment). The growth of intra-regional trade could be a natural result of rapid growth in per capita incomes. A typical East Asian country trades more with another typical East Asian country than it did 20 years ago, partly for the same reason that a typical country anywhere in the world does: the East Asian countries have grown richer and loom larger in the world economy (see Frankel 1993). A simple way of adjusting a grouping’s inn-a-regional trade share for the growth of markets is to divide it by that region’s share of global trade. We denote this statistic as “Ratio 2.” It is apparent that East Asia’s bias toward intra-regional trade did not, in fact, increase over the period 19651980. For APEC, the Western Hemisphere, the EU, and most of the other groupings, in contrast, there was by this measure a discernible trend toward greater intra-regional trade. A more systematic way of adjusting for the natural determinants of trade is by means of the gravity model. The assumptions of the model are that trade between two countries is proportionate to the product of their GNPs and the product of their per capita GNPs, an
Economic Regionalism:Two 20th-Century Episodes 91 TABLE 1.Intra-regional Trade Shares Since the 1960s Intra-regional trade Ratio 1 Total trade of the region Intra-regional trade/Total trade of the region Ratio 2 Total trade of the reglon /World trade 1990 1987 1985 1980 1975 1970 1965 EAEC Ratio 1 0.293 0.263 0.256 0.229 0.213 0.198 0.199 Ratio 2 0.931 0.858 0.842 0.913 0.974 1.011 1.219 APEC Ratio 1 0.532 0.536 0.536 0.420 0.428 0.446 0.446 Ratio 2 1.015 1.029 0.967 0.872 0.908 0.911 0.529 WH Ratio 1 0.285 0.279 0.310 0.272 0.309 0.311 0.315 Ratio 2 0.848 0.794 0.783 0.795 0.878 0.784 0.787 EEC Ratio 1 0.471 0.465 0.424 0.416 0.402 0.397 0.358 Ratio 2 0.802 0.794 0.790 0.716 0.677 0.640 0.566 EFTA Ratio 1 0.076 0.084 0.080 0.080 0.104 0.099 0.080 Ratio 2 0.571 0.621 0.683 0.624 0.799 0.684 0.533 EUR Ratio 1 0.602 0.601 0.548 0.538 0.524 0.532 0.502 Ratio 2 0.957 0.958 0.953 0.860 0.816 0.794 0.738 MERCOSUR Ratio 1 0.061 0.050 0.043 0.056 0.040 0.051 0.061 Ratio 2 2.757 2.042 1.404 1.689 1.075 1.494 1.759 ANDEAN Ratio 1 0.026 0.026 0.034 0.024 0.021 0.012 0.008 Ratio 2 1.728 1.612 1.731 0.887 0.669 0.374 0.181 NAFTA Ratio 1 0.246 0.238 0.274 0.214 0.246 0.258 0.237 Ratio 2 0.788 0.733 0.754 0.710 0.794 0.728 0.670 increasing function of adjacency (when two countries share a common land border),and inversely related to the distance between them.Dummy variables are added when both countries in a given pair belong to the same regional grouping.This provides a means of determining how much trade within each region is due to factors common to trade through- out the world and how much remains to be explained by regional effects. The dependent variable in all regressions is the value of trade (imports plus exports),in log form,between pairs of countries.The standard determinants of trade(national incomes, per capita incomes,distance,and adjacency)are all significant statistically.The estimated coefficient on the log of the product of the two countries'GNPs,at 0.7,indicates that trade increases with size but less than proportionately.This reflects the fact that small countrics tend to be more dependent on trade than larger,more diversified ones.The estimated coef- ficient on the product of per capita GNPs,at 0.3,indicates that richer countries trade more The coefficient on the log of distance is about-0.6,indicating that when distance between two nonadjacent countries is higher by 1%,trade between them falls by 0.6%.2 The coeffi- cient on adjacency,at 0.7,indicates that two countries sharing a common border trade roughly twice as much [exp(0.7)=2.0]as two otherwise similar countries. If there were nothing to the notion of trade blocs,these basic variables would soak up most of the variation in bilateral trade flows,leaving little to attribute to a dummy variable
Economic Regionalism: Two POth-Century Episodes 91 TABLE 1. Intra-regional Trade Shares Since the 1960s Ratio 1 = Intra-regional trade Total trade of the region Ratio 2 = Intra-regional trade / Total trade of the region Total trade of the region / World trade 1990 1987 1985 1980 1975 1970 1965 EAEC APEC WH EEC EFTA EUR MERCOSUR ANDEAN NAFTA Ratio 1 0.293 Ratio 2 0.931 Ratio 1 0.532 Ratio 2 1.015 Ratio 1 0.285 Ratio 2 0.848 Ratio 1 Ratio 2 0.471 0.802 Ratio 1 0.076 Ratio 2 0.571 Ratio 1 0.602 Ratio 2 0.957 Ratio 1 0.061 Ratio 2 2.757 Ratio 1 0.026 Ratio 2 1.728 Ratio 1 0.246 Ratio 2 0.788 0.263 0.858 0.536 1.029 0.279 0.794 0.465 0.794 0.084 0.621 0.601 0.958 0.050 2.042 0.026 1.612 0.238 0.733 0.256 0.842 0.536 0.967 0.310 0.783 0.424 0.790 0.080 0.683 0.229 0.913 0.420 0.872 0.272 0.795 0.416 0.716 0.213 0.974 0.428 0.908 0.309 0.878 0.198 0.199 1.011 1.219 0.446 0.446 0.911 0.529 0.311 0.315 0.784 0.787 0.402 0.397 0.358 0.677 0.640 0.566 0.080 0.104 0.099 0.080 0.624 0.799 0.684 0.533 0.548 0.953 0.043 1.404 0.538 0.524 0.532 0.502 0.860 0.816 0.794 0.738 0.056 0.040 0.05 1 0.061 1.689 1.075 1.494 1.759 0.034 0.024 0.021 0.012 0.008 1.731 0.887 0.669 0.374 0.181 0.274 0.214 0.246 0.258 0.237 0.754 0.710 0.794 0.728 0.670 increasing function of adjacency (when two countries share a common land border), and inversely related to the distance between them.’ Dummy variables are added when both countries in a given pair belong to the same regional grouping. This provides a means of determining how much trade within each region is due to factors common to trade throughout the world and how much remains to be explained by regional effects. The dependent variable in all regressions is the value of trade (imports plus exports), in log form, between pairs of countries. The standard determinants of trade (national incomes, per capita incomes, distance, and adjacency) are all significant statistically. The estimated coefficient on the log of the product of the two countries’ GNPs, at 0.7, indicates that trade increases with size but less than proportionately. This reflects the fact that small countries tend to be more dependent on trade than larger, more diversified ones. The estimated coefficient on the product of per capita GNPs, at 0.3, indicates that richer countries trade more. The coefficient on the log of distance is about -0.6, indicating that when distance between two nonadjacent countries is higher by l%, trade between them falls by 0.6%.2 The coefficient on adjacency, at 0.7, indicates that two countries sharing a common border trade roughly twice as much [exp(0.7) = 2.01 as two otherwise similar countries. If there were nothing to the notion of trade blocs, these basic variables would soak up most of the variation in bilateral trade flows, leaving little to attribute to a dummy variable
92 EICHENGREEN and FRANKEL TABLE 2.Regression Estimates of the Gravity Model,1965-1990 1965 1970 1975 1980 1985 1990 GNP 0.64 0.64 0.72 0.72 0.51 0.74 (0.02) (0.02) (0.02) (0.02) (0.02) (0.02) GNP/capita 0.36 0.45 0.34 0.31 0.06 0.16 (0.03) (0.03) (0.03) (0.02) (0.03) (0.02) Distance -0.47 0.58 -0.76 -0.70 0.49 0.74 (0.06) (0.06) (0.06 (0.05) (0.06) (0.05) Adjacency 0.63 0.54 0.47 0.67 0.70 0.68 (0.17) (0.17) (0.19) (0.18) (0.20) (0.16) EAEC2 1.72 1.53 0.55 0.86 -1.54 1.03 (0.37) (0.36) (0.37) (0.31) (0.33) (0.27) EAECN 0.41 0.11 0.09 0.42 0.89 0.66 (0.16) (0.15) (0.15) (0.12) (0.14) (0.11) APEC2 0.31 0.94 1.23 1.58 2.84 0.90 (0.32) (0.30) (0.31) (0.25) (0.28) (0.23) APECN -0.12 0.11 0.21 0.16 0.73 -0.20 (0.16) (0.15) (0.15) (0.13) (0.15) (0.12) EEC2 -0.10 0.24 0.45 0.24 1.55 0.12 (0.20) (0.20) (0.33) (0.20) (0.21) (0.19) EECN 0.07 0.06 0.07 0.35 0.46 0.06 (0.09) (0.09) (0.08) (0.08) (0.09) (0.08) EFTA2 -0.38 0.30 -0.45 0.04 0.10 -0.49 (031) (031) (0.33) (0.33) (0.36) (0.30) EFTAN 0.57 0.53 -0.60 0.26 -0.58 -0.53 (0.10) (0.10) (0.10) (0.09) (0.11) (0.09) NAFTA2 0.35 0.91 -1.00 0.02 -0.05 0.25 (0.63) (0.65) (0.70) (0.70) (0.72) (0.61) NAFTAN -0.41 0.65 -0.64 -0.19 -0.26 -0.07 (0.14) (0.14) (0.14) (0.12) (0.14) (0.11) MERCOSURZ -0.30 0.38 0.21 0.82 0.79 2.06 (0.45) (0.45) (0.49) (0.50) (0.52) (0.44) MERCOSURN -0.26 -0.08 -0.08 0.11 0.68 0.87 (0.12) (0.11) (0.11) (0.10) (0.12) (0.10) ANDEAN2 0.92 0.001 0.53 0.74 0.07 0.41 (0.53) (0.41) (0.45) (0.39) (0.62) (0.34) ANDEANN -0.10 0.02 -0.01 0.23 0.27 -0.07 (0.11) (0.10) (0.10) (0.10) (0.12) (0.09) Number of 1194 1274 1453 1708 1343 1573 Observations Adjusted R2 0.70 0.73 0.73 0.73 0.57 0.79 Notes:Standard errors are in parentheses.All variables except the dummies are in logarithms. Source: See text
92 EICHENGREEN and FRANKEL TABLE 2. Regression Estimates of the Gravity Model, 1995-1990 1965 1970 1975 1980 1985 1990 GNP GNP/capita Distance Adjacency EAEC2 EAEC, APEC* APEC, EEC2 EEC, EFTA, EFTAN NAFTA2 NAFTAN MERCOSUR, MERCOSUR, ANDEAN* ANDEANN Number of Observations Adjusted R2 0.36 0.45 (0.03) (0.03) -0.47 -0.58 (0.06) (0.06) 0.63 0.54 (0.17) (0.17) 1.72 1.53 (0.37) (0.36) 0.41 0.11 (0.16) (0.15) 0.31 0.94 (0.32) (0.30) -0.12 0.11 (0.16) (0.15) -0.10 -0.24 (0.20) (0.20) 0.07 0.06 (0.09) (0.09) -0.38 -0.30 (0.31) (0.31) -0.57 -0.53 (0.10) (0.10) -0.35 -0.91 (0.63) (0.65) -0.41 -0.65 (0.14) (0.14) -0.30 0.38 (0.45) (0.45) -0.26 -0.08 (0.12) (0.11) -0.92 0.001 (0.53) (0.41) -0.10 0.02 (0.11) (0.10) 1194 0.70 1274 0.73 0.72 (0.02) 0.34 (0.03) -0.76 (0.06) 0.47 (0.19) 0.55 (0.37) 0.09 (0.15) 1.23 (0.31) 0.21 (0.15) -0.45 (0.33) 0.07 (0.08) -0.45 (0.33) -0.60 (0.10) -1.00 (0.70) -0.64 (0.14) 0.21 (0.49) -0.08 (0.11) 0.53 (0.45) -0.01 (0.10) 1453 0.73 0.72 (0.02) 0.31 (0.02) -0.70 (0.05) 0.67 (0.18) 0.86 (0.3 1) 0.42 (0.12) 1.58 (0.25) 0.16 (0.13) 0.24 (0.20) 0.35 (0.08) (:::) -0.26 (0.09) -0.02 (0.70) -0.19 (0.12) 0.82 (0.50) 0.11 (0.10) 0.74 (0.39) 0.23 (0.10) 1708 0.73 0.51 0.74 (0.02) (0.02) 0.06 0.16 (0.03) (0.02) -0.49 -0.74 (0.06) (0.05) 0.70 0.68 (0.20) (0.16) -1.54 1.03 (0.33) (0.27) -0.89 0.66 (0.14) (0.11) 2.84 0.90 (0.28) (0.23) 0.73 -0.20 (0.15) (0.12) 1.55 0.12 (0.21) (0.19) 0.46 0.06 (0.09) (0.08) 0.10 -0.49 (0.36) (0.30) -0.58 -0.53 (0.11) (0.09) -0.05 0.25 (0.72) (0.61) -0.26 -0.07 (0.14) (0.11) 0.79 2.06 (0.52) (0.44) 0.68 0.87 (0.12) (0.10) -0.07 0.41 (0.62) (0.34) 0.27 -0.07 (0.12) (0.09) 1343 0.57 1573 0.79 Nofes: Standard errors are in parentheses. All variables except the dummies are in logarithms s ource: See text
Economic Regionalism:Two 20th-Century Episodes 93 indicating whether two countries are members of the same regional grouping.Variations in intra-regional trade would be due solely to the proximity of countries and their rates of eco- nomic growth.In fact,many of the dummy variables for membership in the same regional grouping are highly significant statistically.(These variables appear with the subscript"2" to denote the fact that both countries are members of the regional grouping.)Consider the results for 1980.The coefficients imply that two countries both located in the Asia/Pacific region traded almost five times as much as would two otherwise similar countries [exp(1.58)-4.85].Two countries both located in East Asia traded an cstimated twice as much [exp(0.86)=2.36].The coefficients for membership in the EU and EFTA are smaller and less consistently significant.There is no evidence of a NAFTA effect in any of the sub- sequent years.There is some,albeit less than overwhelming,evidence of a pro-trade bias among the members of MERCOSUR and,to a lesser extent,the Andean Group. Each equation also includes a second dummy variable set to unity when only one of two trading partners is a member of the regional grouping in question.(These terms appears with the subscript"N'to denote trade with nonmembers of the group.)A negative coeffi- cient indicates trade diversion:that members of a regional grouping trade less with non- members than their economic characteristics and the average behavior of countries in the sample would predict.The 1980 estimates suggest that EFTA was trade diverting.EFTA members traded 23%less with nonmembers than did other countries in the sample,control- ling for other characteristics [exp(-0.26)=.77].On the other hand,most of the"subscript- N"coefficients are significantly positive for East Asia and the EU,indicating that these countries opened up to trade with nonmembers at the same time as they liberalized trade within the region.There are,however,variations in the signs and significance of these coefficients over time.The coefficient for East Asia turns negative in 1985,although it is again positive in 1990.That for APEC turns negative in 1990,although it is insignificantly different from zero at conventional(95%)confidence levels.There is some indication that the members of NAFTA traded less with other parts of the world than would be predicted by their economic characteristics and average behavior of other countries in the sample, although there is no evidence that this effect increased with the negotiation of free trade agreements first between the United States and Canada and then with Mexico. On balance.these results point to the conclusion that the regional trade arrangements of the 1980s were trade creating rather than trade diverting.The strongest evidence of trade- creating effects is for the countries bordering on the Pacific. The Interwar Years Tables 3 and 4 provide comparable analyses for the interwar years.Table 3 displays intragroup trade shares and intragroup trade normalized by the group's share of world trade for the principal potential trade blocs of the period.We adopt an inclusive definition of potential blocs,considering the British Commonwealth,the German sphere of commercial influence (Germany,Austria,Brazil,Bulgaria,Czechoslovakia,Greece,Hungary,and Romania),the dollar area(the Western Hemisphere minus Brazil and Canada),the yen bloc (Japan,Korea,Formosa,and Manchuria),the franc zone(France,Algeria,Tunisia, French Morocco,French Africa,and French Indo-China),and the guilder zone (the Neth- erlands and the Dutch East Indies). Ratio 1 and Ratio 2 behave quite differently in the different cases.There is an upward shift in 1935 in the intra-bloc trade of both the British Commonwealth and the franc zone
Economic Regionalism: Two POth-Century Episodes 93 indicating whether two countries are members of the same regional grouping. Variations in intra-regional trade would be due solely to the proximity of countries and their rates of economic growth. In fact, many of the dummy variables for membership in the same regional grouping are highly significant statistically. (These variables appear with the subscript “2” to denote the fact that both countries are members of the regional grouping.) Consider the results for 1980. The coeffkients imply that two countries both located in the Asia/Pacific region traded almost five times as much as would two otherwise similar countries [exp( 1.58) = 4.851. Two countries both located in East Asia traded an estimated twice as much [exp(0.86) = 2.361. The coefficients for membership in the EU and EFTA are smaller and less consistently significant. There is no evidence of a NAFTA effect in any of the subsequent years. There is some, albeit less than overwhelming, evidence of a pro-trade bias among the members of MERCOSUR and, to a lesser extent, the Andean Group. Each equation also includes a second dummy variable set to unity when only one of two trading partners is a member of the regional grouping in question. (These terms appears with the subscript “w’ to denote trade with nonmembers of the group.) A negative coefficient indicates trade diversion: that members of a regional grouping trade less with nonmembers than their economic characteristics and the average behavior of countries in the sample would predict. The 1980 estimates suggest that EFTA was trade diverting. EFTA members traded 23% less with nonmembers than did other countries in the sample, controlling for other characteristics [exp(-0.26) = .77]. Gn the other hand, most of the “subscriptN” coefficients are significantly positive for East Asia and the EU, indicating that these countries opened up to trade with nonmembers at the same time as they liberalized trade within the region. There are, however, variations in the signs and significance of these coefficients over time. The coefficient for East Asia turns negative in 1985, although it is again positive in 1990. That for APEC turns negative in 1990, although it is insignificantly different from zero at conventional (95%) confidence levels. There is some indication that the members of NAFTA traded less with other parts of the world than would be predicted by their economic characteristics and average behavior of other countries in the sample, although there is no evidence that this effect increased with the negotiation of free trade agreements first between the United States and Canada and then with Mexico. On balance, these results point to the conclusion that the regional trade arrangements of the 1980s were trade creating rather than trade diverting. The strongest evidence of tradecreating effects is for the countries bordering on the Pacific. The lntetwar Years Tables 3 and 4 provide comparable analyses for the interwar years. Table 3 displays intragroup trade shares and intragroup trade normalized by the group’s share of world trade for the principal potential trade blocs of the period. We adopt an inclusive definition of potential blocs, considering the British Commonwealth, the German sphere of commercial influence (Germany, Austria, Brazil, Bulgaria, Czechoslovakia, Greece, Hungary, and Romania), the dollar area (the Western Hemisphere minus Brazil and Canada), the yen bloc (Japan, Korea, Formosa, and Manchuria), the franc zone (France, Algeria, Tunisia, French Morocco, French Africa, and French Indo-China), and the guilder zone (the Netherlands and the Dutch East Indies). Ratio 1 and Ratio 2 behave quite differently in the different cases. There is an upward shift in 1935 in the intra-bloc trade of both the British Commonwealth and the franc zone