Open and Closed Regionalism

Closed Regionalism

Closed regionalism is characterized by trade agreements that lower or eliminate barriers to trade among member states of a regional organization, which are not extended to external countries. Closed regionalism is typically associated with the first wave of regional integration initiatives (or “old regionalism”) that started during the 1950s. These initiatives mainly took the form of free trade areas (FTAs), which eliminate internal barriers to trade and customs unions (CUs), which include harmonized external tariffs among member states. Among countries in Africa and Latin America, for instance, FTAs and CUs, such as the Latin American Free Trade Association (LAFTA), were combined with industrial planning to implement a development strategy known as import substituting industrialization (ISI). The ISI strategy called for the deliberate discouragement of imports into the region so that these countries could take advantage of the increased size of the regional market and develop their domestic industries. Many of these agreements were unsustainable for various political and economic reasons and by the end of the 1970s had not continued forward.

Open Regionalism

Open regionalism, by contrast, is more outward oriented to where intraregional trade preferences are extended to countries outside the region in a movement toward greater trade liberalization. Open regionalism is the form taken by the second wave of regional activity (or “new regionalism”), which began in the mid-1980s and sharply increased after the end of the Cold War. While these new regional developments raised concerns that the global trading system was witnessing a repeat of the rise of protectionist blocs prevalent in the first wave of the 1950s, the more open nature of these recent projects has instead shifted the debate toward whether or not these regional trading arrangements are impediments, rather than barriers, to [Page 635]increased multilateralism. Examples of open regionalism may be found in the Mercado Común del Sur (or Mercosur/Southern Common Market), although with limits, and the Asia Pacific Economic Cooperation (APEC) forum.

Trade Creation and Trade Diversion

One of the central concerns expressed by economists with regard to closed and open regionalism is that of the welfare-oriented effects of trade creation and trade diversion. Jacob Viner, in his seminal work on the topic, The Customs Union Issue, defined trade creation as occurring when countries within an FTA or a CU are able to shift production from the highest-cost to the lowest-cost producer within the region as a result of eliminating internal trade barriers. In this instance, it is argued that welfare increases for both those countries in the area and in the world. However, if the lowest-cost producer is not one of the countries within the area, but one outside of it, and the FTA or CU, through its external tariffs, causes production to shift from the lowest-cost to a higher-cost producer within the region, trade diversion occurs along with an associated decline in regional countries' and world welfare.

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