Feasible multilateralism and the effects of regionalism

Recent research shows that the GATT/WTO negotiating rules are capable of delivering a politically efficient equilibrium. Such an equilibrium is, however, economically inefficient. Global free trade, in particular, is unattainable even in a fully cooperative world, if governments have political motivations. In such a context, we show that regional trade agreements can help move the world towards a welfare-superior equilibrium. The reason is that, when members of regional trade agreements lower trade barriers against one another, they tend to reduce their multilateral tariffs as well. Once we account for these endogenous changes—and only then—we find that regionalism can raise world welfare even in a fully cooperative (but political) world. Regional integration can, however, harm outsiders.