ighbor protection and drove international trade into a nosedive and theworld’s economy into a prolonged depression. Over the1929–32 period,international trade shrank by 25 percent in terms of volume and declined 40percent in value (Anderson, 2001). This demonstrates the pressing need formultilateral discipline in the area of international trade.A superficial glance at the relationship between multilateralism andregional integration could lead one to believe that they work at cross-purposes.Therefore, the oldest concern in the regional trading blocs and customs unionliterature is whether regionalism helps or hinders free trade, or whether itunderpins or undermines multilateralism.7 Vigorous debate on this issuecontinued during the 1990s. The current form of the age-old query is whether
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Regionalism in global trade
regionalism is a ‘building block’ or ‘stepping stone’ for advancing towardsmultilateralism, or a ‘stumbling block’ on the way to multilateralism or a‘millstone’ around the neck of progress towards free trade and multilateralism.While some researchers see regionalism as a potential threat to multilateralism, others believe that it contributes to free trade and multilateralism.Consensus on this issue is yet to emerge.An oft-cited argument is that RIAs divert attention from multilateralism andexpend scarce negotiating resources, but the recent negotiating realities pointin a different direction. Before the Doha Ministerial Conference (2001),8negotiators from the industrial economies, particularly the EU and the US,built a strong consensus with those developing economies that were inpartnership with them in various RIAs, which in turn contributed to thesuccess of the Doha Ministerial Conference. These alliances were also crucialin the launching of the round of multilateral trade negotiations (MTNs), theso-called Doha Development Agenda. Support and cooperation for a newround from the African and Latin American economies was sought by thelarge industrial economies by making promises of concessions during theMTNs on agriculture, patents and public health related issues (Schott, 2002).Thus, close ties between the developing and industrial economies developedin RIAs resulted in providing an impetus to multilateralism. An admixture ofregionalism and multilateralism can potentially coalesce to advance globaltrade liberalization.One important reason why a consensus on such an admixture has notemerged is that RIAs differ so much from each other that there is littleempirical evidence on their effects, which could be taken for the representativeimpact of RIAs. Second, there are a number of reasons to believe that RIAsimpinge or encroach upon multilateralism. This topic has provoked a gooddeal of debate among trade economists and concern among policymandarins – consequently there is a growing body of research addressed to it.Apprehensions regarding proliferation of RIAs undermining the multilateraltrade system were frequently raised in the global fora and this concern waspartly responsible for the creation of the WTO Committee on Regional TradeAgreements (CRTA) in February 1996.Using a monopolistically competitive model, Krugman (1991a)demonstrated that regional trade and integration could potentially raise thelevel of common external tariffs (CET), if the trading bloc is non-cooperative.He also posited that ‘countries that join trading blocs will be moreprotectionist towards countries outside the blocs than they were before, so thatthe world as a whole will be hurt more than helped by moves that at first seemto be liberalizing in intent’. This analysis was narrow in the sense that itfocused only on customs unions, at the exclusion of the FTAs. Yet, it sparkeda good many responses and reactions. A group of follow-up studies
Globalism versus regionalism
7
demonstrated that Krugman’s (1991a) results were strongly based on some ofhis assumptions.9 Also, those who responded laid far more emphasis on thetransport costs than Krugman did in quantifying the impact of the RIAformation. When they introduced transport costs in the model used byKrugman (1991a), they concluded that RIAs resulted in welfare losses iftransport costs were low. By relaxing his imperfect substitute assumption, oneof these studies found that global welfare rises as the global economy travelsbetween autarky and free trade in the context of a Ricardian trade model(Deardorff and Stern, 1994).Several studies used the Vinerian logic (see section 6 below) and concludedthat there is an overwhelming possibility of a large volume of trade diversionfor the RIA members, leading to significant welfare losses, both individuallyand globally.10 Krueger (1996), in particular, contended that RIAs constituteda potential threat to the world trading system because they are in generaltrade diverting. In addition, she posited that RIAs created lobbies and interestgroups against multilateral trade liberalization in their member countries.These results did not go unchallenged. In opposing them, several analystspresented evidence that supported favorable outcomes of RIA creation.Nordstrom (1995) contended that by forming RIAs, small economies receiveda greater incentive to liberalize multilaterally because by doing so they coulddeal more effectively with large economies as well as trading blocs. Similarsupportive conclusions were arrived at by Perroni and Whally (1996) whoargued that as a majority of the recent RIAs have preferred to remain restrictedto regional trade agreements, they could choose their common external tariffsfreely. Therefore, in contrast to what Krugman (1991a) has contended,regional blocs’ monopoly power need not necessarily increase, and formingRIAs has not necessarily resulted in higher tariffs between trade blocs.Therefore, increasing regionalism cannot be taken to necessarily imply anincreasing potential threat to multilateralism. Campa and Sorenson (1996)agreed with this inference and argued that the global free trade equilibriumcan be sustained if small economies form trading blocs. Their integrationcan effectively undermine the market power of large trading countries orRIAs.
3. DEFINITION AND TEXTURE OF REGIONALISMTrade liberalization per se is a complex and diffused issue – although it isgoverned by simple principles. Regional trade liberalization is even morecomplex. As set out in section 1, the basic objective of a trading bloc is tobring down tariffs between the members of the bloc and discriminate againsttrade with other countries. In its most rudimentary form a trading bloc merely
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Regionalism in global trade
removes tariffs on intra-bloc trade in goods. It is appropriate to outline thecharacteristic structures of RIAs and define them. Functionally, if somewhatloosely, it could be defined as any agreement of preferential trade in which aset of trading partners reciprocally reduce trade barriers. The trading partnersmay or may not be contiguous or even close to each other. Page (2000) hasmade a noteworthy attempt and defined an RIA as a group of countries, whichhave ‘created a legal framework of cooperation covering an extensiveeconomic relationship, with the intention that it will be of indefinite duration,and with the possibility foreseen that the region will economically evolve inthe future’. The criterion of extensive economic linkage precludes single-issuealliances, while that of permanence is uncontroversial. The criterion ofevolution is obvious and reinforces exclusion of groups formed for a limited,or a single, objective. The need for a dynamic evolution over time, à la Page,is inevitable because countries’ economic structures change constantly, andwith that their linkages with the members of their RIA.Benefiting from the previous literature, Page (2000) took a comprehensiveand integrated vision of RIAs. According to this, the economic and regulatorylinks between trade and the rest of the economic systems of the RIAmembers are expected to gradually harmonize and strengthen. However, thisstrengthening process needs to be led by the trading relationship.Conventionally, formation of an RIA entails lowering of the usual tradebarriers, which brings to the fore a sequence of other differences in theRIA-forming economies which, if left unharmonized, would necessarily havea negative effect over trade expansion in the RIA.The typology of RIA (refer to section 8) is not only revealing but it alsoindicates a linearity of form and the likely process of evolution. It could becalled the expansion path of a preferential trade agreement (PTA). The linearmovements occur in the following sequence: first, freeing trade in goods andservices of all tariff barriers within the RIA; second, freeing capital and labormovements within the RIA, followed by the right of establishment; third,minimizing and subsequently eliminating non-tariff barriers (NTBs) andmoving on to the harmonization of taxes as well as monetary and fiscalpolicies.11 Finally, a common currency for the RIA is created and economicand financial policies are integrated.As alluded to in section 1, I employ the acronym RIA in this book, which isused as a generic acronym. It means what it says and sounds benign andbusinesslike. Although ‘regional trade agreement’ is the favorite term andacronym of WTO publications, I prefer RIA. Why? Essentially because RTAis narrow in its scope and provides for partners to grant each other merelypreferential tariff treatment on a reciprocal basis. Unlike ‘RTA’, the acronym‘RIA’ has broader implications and promotes open trade and cooperation. Thatis, partners grant each other much more than mere tariff concessions on a
Globalism versus regionalism
9
reciprocal basis. As revealed by a half century of evolution of the EuropeanEconomic Community (EEC),12 the process of evolution of an RIA can haveseveral stages. It may take a myriad of forms and go beyond the RTA stage.Therefore, we consider it a better acronym than RTA for use in a genericsense. It can refer to a variety of preferential agreements that coverliberalization of trade and factor movements. It can also cover bilateral,regional and plurilateral (having three or more members) agreements of apreferential nature. It can also imply deeper integration than a mere tradeagreement. Schiff and Winters (2003) also use the acronym RIA to ‘first toavoid any unsubstantiated pejorative implication, and second to communicatethat arrangements can extend well beyond international trade into areas suchas investment, domestic regulation and policies, standards, infrastructure andpolitics.’ Although the primary focus of this book is on free trade areas (FTAs)and customs unions in the area of goods and economic integration agreements(EIAs) in the area of services, partial and non-reciprocal agreements havealso been touched upon wherever appropriate. The RIAs that we discuss inthis book are those that have been formally notified to the GATT–WTOsystem.
4. REGIONAL INTEGRATION AND TRADINGAGREEMENTS: THE GENESISThe current march of regionalism is decisively not the first ever in history.Regional trading arrangements can be traced back to the sixteenth centurywhen proposal for a union between England and Scotland was made in1547–48. The 1703 Act of Union of England and Scotland established apolitical and economic union. All the French provinces were united into acustoms union by the Revolutionary government of 1789–90.In the United States, the American colonies maintained separate tariffsystems with a moderate number of custom duties, until the Constitutionadopted in 1789 barred the individual states from levying any duties on tradewith other states. In Germany, the Zollverein was formed (1818–34) amongeighteen small states. In modern parlance it was a customs union, andpreceded the unification of Germany in 1871. Likewise, the SwissConfederation was established in 1848 as an economic union and Italian stateswere united as a customs union during 1860–66. A customs union wasestablished between Norway and Sweden in 1874–75. The experiences of theAustro-Hungarian Empire were different as unlike these successful examples,it went down in history as a failed attempt to form a customs union. TheBenelux customs union was established between Belgium, Luxembourg andthe Netherlands in 1944 (Machlup, 1977).
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Regionalism in global trade
During the contemporary period, the Treaty of Rome (1957) forming theEEC could be considered the beginning of regional trading blocs, or the firstwave of regionalization. The EEC was the precursor to the first wave ofregionalism in the 1950s and 1960s. Subsequently, the Stockholm Conventionestablished the European Free Trade Area (EFTA) in 1959, and theMontevideo Treaty established the Latin American Free Trade Area (LAFTA)in 1960. In 1963, the Yaoundé Convention between the EEC and formerFrench, Belgium and Italian colonies in Africa gave these countries preferential access to the EEC markets. This was a non-reciprocal trade agreement.Following the formation of the EEC, there was a proliferation of regionalagreements in the developing countries of Africa and Latin America, albeit notAsia. The first wave of regionalism was weak, short-lived and did not go far.With the notable exception of the EEC, the regional initiatives of the 1950sand the 1960s amounted to very little. Thus, the first wave of contemporaryregionalism did not flourish outside Europe. Earlier regional initiatives like theAndean Pact had collapsed, although it was reborn in 1988 when Protocol ofQuito called for amendment to the Andean Group’s (AG’s) founding treaty.13The RIAs of this period were neither large in number nor successful. Oneof the most important reasons was that the US, the largest trading economy,was philosophically committed to multilateralism and opposed to regionalism.The US had a historical bias toward MFN-only liberalization and consideredregional initiatives a force which worked against multilateral liberalization,which had the highest priority in its international economic thinking. The UStook a polemical stance and relentlessly championed the cause of free tradethrough the GATT. However, the formation of the EEC received US supportbecause the US saw a united Western Europe as an effective deterrent to thegrowing Soviet threat.One important reason why developing countries were initially attracted tothe concept of regionalism during this period was their belief thatregionalization would help them in industrialization. This was an era whenimport-substitution (IS) strategy was still popular in the developingeconomies, in particular in the South Asian and Latin American developingeconomies. Many developing countries were making serious endeavors toindustrialize through domestic and regional import substitution. Policymandarins believed that infant industries could first learn to export within aprotected small regional market – and then face the strong winds ofcompetition in the extra-regional or global markets. However, the story of ISstrategy is one of failure. It failed both domestically as well as in regions. Bythe late 1970s, outward-orientation or export promotion (EP) strategy hadbegun to capture the admiration of policy makers in the developingeconomies. Consequently, they considered regionalism as an irrelevant policyinstrument and pushed it into the background.
Globalism versus regionalism
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In 1983, the Australia–New Zealand Closer Economic Relations TradeAgreement (or CER) was signed.14 This was the only major RIA that wasnegotiated and established during the 1980s. The CER was not a part of thefirst wave of regionalism. This could be considered a belated reaction to theformation of the EEC and its well-publicized future plan for the SingleMarket, called the EC-92. The CER is a free trade agreement and supports thetrans-Tasman economic relationship. A 1988 Protocol to the CER on theAcceleration of Free Trade in Goods provided for the elimination of all tariffsand quantitative restrictions by July 1990. The Trade in Services Protocol tothe CER, signed in 1988, brought services into CER from January 1989.Almost all trans-Tasman trade in services opened up after that. The CERboasts of being the most successful RIA on the globe, both from theoreticaland practical viewpoints.
5. STRUCTURAL VARIATIONS AND DIVERSITYRIAs vary significantly along many dimensions. They come in all sizes andshapes. A glance at the present RIAs reveals that regionalism has variedobjectives and can potentially take a myriad of different forms and structures,each with different implications and nuances. For instance, they varyenormously in income levels and the shares of intra-RIA trade. Theirstructures may vary from loose agreements to facilitate trade of the AfricanCross-Border Initiative or Asia Pacific Economic Co-operation forum,through to the deep integration of the European Union. They can follow theprinciple of open or closed regionalism, two fundamentally different varieties.Closed regionalism was rampant in some parts of the global economy in thepast, particularly in Latin America and sub-Saharan Africa. An RIAmovement can be initiated in a coercive or a benign manner. It can beconsensual or hierarchical. It can stop at free trade in goods, emphasizeeconomic integration, or political and strategic ties. It can be a consequence ofthe decentralized operation of market forces, or a product of determined actionof the concerned states. Therefore, one can infer that RIAs are highlydissimilar and each one is sui generis.The extent of liberalization in trade in goods can vary across RIAs. Manydo not even cover all trade in goods. Generally services are not included inRIAs, exclusive economic integration agreements are made for regional orpreferential trade in services. Cross-border transfer of factors of productiononly becomes part of an RIA if constituent members move towards deepintegration, as does the common external trade policy. It often takes place afteran RIA has withstood the test of time and operated in a satisfactory manner fora long enough period, and constituent members feel sanguine about the
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Regionalism in global trade
success of deeper integration. Trade in agricultural products is frequentlyexcluded from the RIAs. It is often dealt with at the multilateral level.Frequently there are loopholes in RIAs that allow for the continued applicationof contingent protection measures like anti-dumping on intra-RIA trade.Interpretation and application of the rules of origin (ROO) varies enormouslyacross RIAs.15 It has been observed that even in serious RIAs like EFTA andNAFTA, some exporters prefer to pay MFN tariffs on intra-RIA trade thanincur the cost of documenting that their exports fulfill the requirements for theROO.The functioning procedures of RIAs also differ considerably. In theiroperational style, some RIAs are dynamic. They keep moving forward,and work towards eventual deeper integration. Others are consciously standalone, static, agreements. Some RIAs are simple in structure and are governedby few regulations. Others are intractably complex and have a largeframework of supra-national institution network and intricate regulations.Other than the five formal forms identified in section 8, there are markeddifferences in substance and form among RIAs. The variety and differencesamong RIAs reflect differences in the objectives of the countries formingthem. Most analytical studies treat them as similar, which is an obviousmistake. Results of many empirical exercises based on this assumption tend tobe dubious.Members of an RIA can and do differ in important economic features.One of the features of economic integration is the level of economicinterdependence among the member economies. Large RIAs like APECforum, the EU and NAFTA provide interesting illustrations. For instance,trade as a proportion of GDP is high for most of the member economies of theEU. This does not apply to the members of APEC and NAFTA. The membersof these two RIAs are less interdependent. Furthermore, trade between themember states is lower as a percentage of GDP in APEC and NAFTA.Another interesting difference is that extra-regional trade tends to be morewidely spread for APEC and NAFTA than for the EU. The differences amongmember economies regarding dependence in the areas of trade and investmenton the members of the RIA determine the level of symmetry in the economicrelationship of the members. As may be anticipated, this relationship can varybetween symmetrical and asymmetrical.An unmistakable fact about RIAs is that they have a political dimensionbecause all countries and regions are political entities in their own right.Therefore, many of their objectives go beyond trade and economic integrationand take on political overtones. For instance, the early steps taken by Franceto create the EEC began with Robert Schuman, the French Minister of ForeignAffairs, suggesting that the coal and steel resources of France and Germanyshould be pooled, ostensibly for reconstructing the post-War Europe. The
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celebrated European Coal and Steel Community was created in 1951. Thisendeavor was largely driven by a strong proclivity to integrate economicallyto resolve the political and security problems of Western Europe. FrancoGerman economic integration was meant to tie Germany to France and theother European states, and thereby, reduce its ability to engage in aggressionand warfare. The EEC was intended to make a Franco-German war not only‘unthinkable, but materially impossible’. Thus, economic integration was usedin an undisguised manner to reduce risks of war and political conflicts (Baun,1996). Economic agents in the neighboring states can stimulate deeper tradeand investment ties and the resulting regional economic interdependence cancreate a demand for greater political cooperation. This process can potentiallywork in reverse as well, that is, political integration can become a driving forcebehind economic integration. The EEC and APEC represent these two kindsof dynamics. The Asia-Pacific region characterizes the first kind of regionalintegration dynamics, which is the opposite of the top-down processencountered in the EEC. Export-oriented Asian economies have expandedtrade and investment in the region without any political agenda. APEC andother region-wide political dialogues have tried to capitalize on the investmentand trade ties.The foregoing exposition brings home the fact that a wide diversity incontent and form is commonly to be found between RIAs among bothdeveloping and industrial countries. While tariff elimination is common to allof them, differences commonly exist on agreements related to (1) quantitativerestrictions, (2) positive or negative list approaches, (3) rules of origin,(4) external tariffs, (5) timetable for liberalization, (6) trade in services,(7) movement of labor and capital, (8) promotion of industrialization,(9) promotion of trade objectives, and (10) payments arrangements (Whalley,2000). RIAs between industrial economies are generally concerned with andadopt variant approaches in dispute settlement procedures, including disputesettlement in the areas of anti-dumping and countervailing duties, as well astrade provisions relating to environmental standards. Some analysts made afurther distinction between unipolar and hierarchical or multipolar anddecentralized RIAs (Whalley, 2000; Ikenberry 2000). The former is severalsmall economies entering into an RIA with one large one, while more than onelarge economy is part of the latter. They are also known to have complexsectoral arrangements in areas like textiles and apparel and vehicles. The EUhas extensive sectoral arrangements in agriculture, steel, inter-regionalresource transfers and labor mobility provisions. However, these provisionsare not to be found in APEC or NAFTA.Ikenberry (2000) presented the diversity in regionalism along two axes,namely, organizational mode and principal motives behind integration (Figure1.1). Seen in this manner, APEC will have to be put in the lower left cell of
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Regionalism in global trade
Organizational mode
Principal Motives of Regional IntegrationEconomic
Political
UnipolarHierarchical
NAFTA
Japan’s GreaterEast-AsiaCoProsperitySphere in the 1930s
MultipolarDecentralized
APEC
EU
Source:
Ikenberry (2000).
Figure 1.1 Diversity in regionalism
the matrix, NAFTA in the upper left cell and the EU in the lower right cell.There are not many examples of unipolar, hierarchical and politically drivenregionalism during the current period. Japan’s concept of Greater East AsiaCo-Prosperity Sphere of the 1930s, although it never came about, was the onlyexample of this kind.Notwithstanding the diversity in the current trend in regionalism, thefollowing characteristics are frequently – albeit not always – to be seen inmany of the contemporary RIAs. First, the current RIAs typically involve oneor more small countries linking up with one or more large industrialeconomies. Second, the small economies joining an RIA presently undertakesignificant economic reforms and restructuring. It is true of the Central andEast European Countries (CEEC) and Latin American economies. Third, thetrade liberalization that is affected is largely confined to concessions given bythe smaller partners of the RIA, generally not by the larger constituenteconomies. The reason is that the latter group has fairly, if not quite,liberalized economies. Typically the small countries get only small tariffadvantage, because the larger partners of the RIAs have low tariffs to beginwith (Ethier, 1998a).
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6. STAGES OF INTEGRATION AND NOMENCLATUREThere are several possible levels of integration between independent statesthat apply MFN treatment in trade with each other. Regional integration canpotentially have many stages and formal shapes. These stages of integrationrange from shallow to deep. Corresponding to the stage of integration, an RIAcould have a spectrum of institutional frameworks or arrangements varyingfrom preferential trading areas (PTAs), to free trade areas (FTAs), to customsunion (CU), to common markets and finally to economic union. These are thefive standardized tiers or stages of RIA (Figure 1.2). Combinations of twostages, like a free-trade area and customs union, are also feasible.PTAs are the first-tier arrangement. In this arrangement, trading partnersgrant partial non-discriminatory tariff concessions to each other.16 They leavetheir other tariffs, non-tariff barriers and quantitative restrictions unchanged.‘Other’ in this case means trade barriers towards the non-members or the restof the world. In a free trade area, which is the second tier, members of a PTAeliminate all tariffs and NTBs among themselves, but each member can set itsown tariff rates on imports from non-members or the rest of the world (as withthe Association of South East Asian Nations and North American Free TradeArea). The third tier is a customs union in which members go beyondremoving tariff barriers and non-tariff barriers among themselves and set acommon level of trade barriers vis-à-vis non-members (as with the EU). Thesethree stages of regionalization directly and exclusively affect internationaltrade of the member countries and are considered shallow integration.Some trade economists take CUs as the beginning of deep integration. Thefourth tier is a common market and is considered the first deep integrationThree shallow integration stages
Preferentialtrade agreementsPartial preferenceto trading partners
Source:
Free-tradeareaEliminationof all tariffs,QRs andNTBs
Custom unionCommon levelof trade barriersvis-a-visnon-members
Two deep integration stages
EconomicunionCommonIntegratingmarketFree movements nationaleconomicof factors ofpolicies andproductiona commoncurrency
Inspired by Low (2001).
Figure 1.2
Spectrum of formal regional trading arrangements
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Regionalism in global trade
stage. This stage attempts to harmonize some institutional arrangements andcommercial and financial laws. Beyond free exchange of goods and services,a common market entails free movement of factors of production. The fifthstage is the economic union, which goes a step beyond the free movement ofgoods, services, and factors (Ethier, 1997; Ethier, 1998a, Frankel, 1997).17 Aneconomic union, the last-tier RIA, involves integrating national economicpolicies, including taxes and common currency. At its deepest, an RIA mayeven include construction of shared executive, judicial and legislativeinstitutions (see Figure 1.2).Given the variety of possible formal shapes and tiers in RIAs, it is easy tofind a significant range in them in real life. They vary from simple exchangeof preferences on a limited range of products between two or more economiesat one end of the spectrum, to agreements that include a large number of traderelated provisions and go beyond traditional tariff reduction or elimination atthe other end. Generally, partial-scope agreements are made essentially amongthe developing economies. In the partial-scope agreements, as the nameindicates, economies exchange concessions on a limited range of products.The opposite is true for the industrial economies. RIAs among them aregenerally deep and far-reaching. This is partly due to decreasing tariffs amongthem for most non-agricultural products. The recent RIA arrangements amongthe industrial economies tend to go far beyond the traditional tariff-slashingexercises. They even tend to go beyond the present multilateral discipline. Inmany RIAs among industrial economies regional regulations includeregulations on investment, competition, and standards. In a small number ofcases labor and environment are also included.A CU typically calls for a greater degree of political coordination andintegration than PTAs and FTAs. Unlike PTAs and FTAs, CUs need supranational institutions and a body of common law. These institutions are interalia needed for negotiating common external tariffs and revenue sharingarrangements. Second, the aim in forming a CU generally extends beyondeconomic objectives. It often includes creation of regional public goods likepromoting regional democracy or regional security, as was seen in the cases ofthe EEC and MERCOSUR. The creators of the idea of the EEC, RobertSchuman and Jean Monnet, were explicit and emphatic about this objective.As regards MERCOSUR, the objectives of international security andstrengthening fragile democracies played a significant role. Having ademocratic government system was made a pre-condition of membership ofMERCOSUR.Some CUs evolved further into deeper integration and became commonmarkets over time. Common markets entail free movements of factors ofproduction and harmonization of regulations and standards between theconstituent members. They need a greater range of supra-national institutions
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and a body of law to run them than a CU does and a higher degree of politicalco-ordination between the member states. In the RIAs with deep integration,the integrated markets or economies take precedence over national boundariesand the residency or nationality of the economic agents. The higher levels ofeconomic integration entail the sweeping away of national controls (forcustoms, fiscal, statistical, health and safety, and security reasons) at theinternal frontiers of an RIA. In addition, a common trade policy is agreed uponand established by the constituent members of the RIA. The common tradepolicy sweeps away technical barriers to trade in goods and services betweenthe members. Also, harmonized policies are established in areas like healthand safety, technical and environmental standards, intellectual property rights,competition policy, government procurement, and corporate and labor laws.This is done with an objective of creating a monetary union in the foreseeablefuture. A historical look at the CUs shows that some of them went further andevolved into nation states over time. For instance there was the unification ofItaly in 1861 and the German Zollverein, which evolved into the German statein 1871. Romania was created from Wallachia and Moldavia in 1881 (Schiff,2001).According to the WTO statistics, in the present population of RIAs thedominant category is that of FTAs, which accounts for 72 percent of all theRIAs currently in force. Partial trading agreements concluded among thedeveloping economies and customs unions account for 19 percent and9 percent, respectively, of the existing RIAs. The strong penchant for formingFTAs among countries is easy to explain. They do not require prolongednegotiations and are easy to negotiate, although the degree of integration underan FTA is low. Conversely, a customs union promotes greater integrationbetween the member economies, provides for the establishment of commonexternal tariffs and harmonization of trade policies. As the scope of customsunions is wide, they can s