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East Asian Economic Review Vol. 11, No. 2, 2007. pp. 77-110.

DOI https://dx.doi.org/10.11644/KIEP.JEAI.2007.11.2.171

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A Test of Endogenous Trade Bloc Formation Theory on EU Data

Author

Richard Edward Baldwin

baldwin@hei.unige.ch

Roland Rieder

roland@rieder-uhren.ch
Creative Commons Attribution License

EAER is an open access journal distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license.

Abstract

This paper empirically confronts one explanation of spreading regionalism with the European experience. The domino theory asserts that forming a preferential trade area, or deepening an existing one, produces trade diversion that generates new political-economy forces in third nations as third-nation exporters seek to redress the new discrimination and profit from newly deepened preferences. The pressure increases with the bloc’s size, yet bloc size depends upon how many nations join, so a single incidence of regionalism may trigger several rounds of membership requests from nations that were previously happy to stay out. We estimate a time-series of EU trade creation and diversion over the last five decades and use these to estimate a model of EU membership demands. The results provide broad support for the model and show that trade diversion has a more powerful impact on membership than trade creation.

JEL classification: F13, F15

Keywords

Domino Theory, Regionalism, FTAs

Language

English

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