CHAPTER ONE

1.1       INTRODUCTION

Mercantilism and liberalism have co-existed in the international system since the formation of nation-states. They have led various attractions for states who use them to achieve their specific purpose. Mercantilism has been used as a doctrine of state formation.                        In the early 1960s most developing states adopted mercantilism for the purpose of rapid industrialization and economic development. They adopted protectionist policies of hiding “infant industries” behind tariff and non-tariff barriers with the hope that these industries would grow and eventually be able to reap the benefits of large – scale production, lower costs and subsequently compete in the world markets.

The reality however was that many of such industries never grew up but rather

tended to be inefficient behind their protective barriers. Consequently by the 1980s, most of them failed and in the process collapsing the economies of the countries that pursued such policies.

Trade liberalization subsequently received a boost as many such countries took to unilateral liberalization.     This was pursued side by side with multilateral liberalization under the auspices of General Agreement on Tariffs and Trade (GATT); formed in 1947 for the purpose of creating a forum for negotiating reduction and removal of tariffs and non-tariff barriers in international trade.

Significant progress in trade barriers reduction was made under the various GATT

negotiations called rounds until the process stalled during the Uruguay Road (1986-94).                Impatient with the political quagmire into which the multilateral negotiations had been stalled, most countries took to negotiations at regional levels. Yet, after the resumption and completion of the Uruguay Round, trade

9

liberalization was pursued through both regional and multilateral agreements simultaneously by the majority of the countries involved.

It soon became apparent that the regional approach increasingly came to dominate

the process as more and more countries went into Regional Trading Agreements (RTAs). This was for a number of reasons. In the first place the regional option was less time consuming. Secondly, it was found to be less complicating striking an agreement with a few neighbors than with over 100 countries in a multi-lateral negotiation. Additionally, other motivational factors like national security act to make regional groups more willing to liberalize further than under global arrangements. It came to be taken for granted that both regional and multilateral agreements were complementary and alternative paths to global liberalization.

The scenario however began to change when three major and powerful trading blocs emerged on the international trading system. These are the European Union (EU), Asian-Pacific Economic Co-operation (APEC) and North American Free Trade Area (NAFTA). The emergence of these regional blocs with big and growing markets raised doubts as to whether they might not tend towards protectionism by failing to facilitate the rules of multilateralism and even flout them.

The anxiety was spawned by developments in these regional trade blocs. The EU has a membership that is expanding rapidly and intra-regional trade is growing more than trade with outside countries. Also some of its preferential arrangements with other regions tend towards undermining the GATT principles of non-discrimination and open competition. Such developments, it is feared, may lead Japan into gaining control of the Asian bloc’s markets and manage them as to inhibit free entry of firms and products from outside. With regard to the United States (US), it was obvious it had started showing signs of abandoning

10

multilateralism and tending towards the protection of certain economic sectors from external competition because of trade and budget deficits. These trends were perceived as harbingers of the pernicious effect of regionalism on the process of global free trade.

With these developments, it is becoming apparent that the future of global

liberalization seems to depend on the path threaded by these regional blocs. Whether regional blocs and multilateral liberalization are conflicting or complementary processes will depend on the extent to which these blocs remain supportive of the multilateral trading system.                                       If they chose to accept new members, create trading opportunities and provide momentum for non-discriminatory trade liberalization effects instead of creating special interest groups then, both systems would be found to be complementary.

1.2       Statement of the Problem

The process of regional bloc formations has turned into a race for securing preferentially the neighbors market for one’s exports. The European Union has moved aggressively to conclude free trade agreements with its neighbors in Eastern and Central Europe and with the Baltic Republics while the US has gone to promote the idea of free trade of the Americas. This race between two giants has in turn led to a renewal of efforts for preferential trade arrangements by and among smaller countries in Africa, Latin, South and Central Asia, Central and Eastern Europe. Because preferential trade arrangements are inherently discriminatory, their proliferation has called into question their impact on the multilateral process of trade liberalization.

1.3       Objective

The objective of this study is to determine if evolving major regional blocs are tending towards protectionism or liberalism in their trade policies. It is hoped

11

such revelation would help in determining whether regionalism is pernicious to global free trade.

1.4       Propos