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date: 25 March 2017

The International Political Economy of Regionalism

Summary and Keywords

Economic regionalism has been dominated by preferential trade agreements (PTAs). Not only have their numbers surged since the end of the Cold War, we also see different varieties of PTAs emerging. First, long-standing PTAs have evolved into deeper forms of economic regionalism, such as custom unions, common markets, or currency unions. Second, PTAs increasingly involve “behind-the-border” trade liberalization, such as the coordination of domestic trade–related regulatory standards. Third, many of the PTAs that were established over the past 25 years no longer only involve countries of the “Global North” but are formed by developing and developed countries (“North-South” PTAs) and between developing countries (“South-South” PTAs). Finally, a most recent development in economic regionalism concerns the building of so called “mega-PTAs,” such as the Trans-Pacific Partnership (TTP) and the Transatlantic Trade and Investment Partnership (TTIP), combining several PTAs.

In order to explain the formation, proliferation, and evolution of these varieties of PTA, existing international political economy (IPE) approaches have to give more credit to political factors, such as the locking-in of domestic reforms or the preservation of regional stability. Moreover, IPE scholarship should engage more systematically with diffusion research, particularly to account for the spate of deeper regionalism. Finally, “rising powers” and “emerging markets” constitute an exciting new research area for IPE. These new players differ with regard to the importance they attribute to regionalism and the ways in which they have sought to use and shape it. Identifying and explaining variations in the link between rising powers and regionalism is a key challenge for future research

Keywords: economic regionalism, preferential trade agreements, deep integration, deep PTA, North-South PTA, South-South PTA, mega-PTA, diffusion, rising powers, emerging markets

Introduction

The international political economy (IPE) of regionalism focuses on the interactions of political actors in negotiating and coordinating economic policy outcomes through regionally based international institutions. The most prominent form of such economic regionalism is the preferential trade agreement (PTA). After the end of the Cold War, their numbers surged increasing more than five times. Next to this change in quantity, long-standing forms of economic regionalism have deepened from PTA or free-trade area (FTA) to customs union with a common external tariff vis-à-vis third parties, or from custom union to common market where goods, services, capital, and labor are free to move, or economic union, which also involves the coordination of various social, fiscal, and monetary policies among participating states. Moreover, a growing number of PTAs aim for deeper forms of economic cooperation and integration that go beyond granting member states preferential access to each other’s markets. Such “behind-the-border” trade liberalization includes the coordination of domestic trade–related regulatory standards. “Deep integration” PTAs have been spreading due to increased global production sharing (World Trade Organization, 2011). We also see the emergence of new types of PTAs, which are formed between developing and developed countries (“North-South” PTAs) and between developing countries (“South-South” PTAs). Finally, a most recent development in economic regionalism concerns the building of so-called “mega-PTAs,” such as the Trans-Pacific Partnership (TTP) and the Transatlantic Trade and Investment Partnership (TTIP), combining several PTAs.

This article provides an analytical and theoretical framework for studying the changes in the quantity and quality of economic regionalism since the end of the Cold War. The first part discusses the conceptual foundations for IPE scholarship of regionalism, in which regionalism is defined as a primarily state-led process of building and sustaining formal regional institutions among at least three states (see Börzel & Risse, 2016c). Since the scope of the article is limited, we follow the IPE literature in focusing on PTAs and provide a mapping of their formation, proliferation, and evolution over the past 25 years.

The second part reviews the existing IPE literature and examines to what extent the various approaches can explain the formation and spread of different types of PTA. While economics matters, we argue that political factors are important drivers for the formation, proliferation, and evolution of PTAs, particularly when it comes to the formation of North-South and South-South PTAs. PTAs do not only serve to provide mutual market access among members. Next to attracting foreign aid and trade by third parties, they can also help governments to lock in domestic reforms and foster regional stability. Finally, we advocate a stronger engagement with diffusion research to explain the spate of deeper regionalism.

The final part of the article is devoted to identifying new areas of research. In particular, we argue that the arrival of new players at the international stage—such as “rising powers” and emerging markets—raises important questions about the future of regionalism and the attendant IPE scholarship. How important is regionalism for the rising powers, and how have they shaped regionalism, whether in their respective regions or on a global scale, or if at all? What are their priorities as evidenced in their activities related to regionalism? We contend that identifying the variation in the relationship between rising powers and regionalism is a key challenge for future research on regionalism. To this end, the article concludes by discussing the extent to which the theories and approaches presented in the previous sections can help us understand and explain the relationship between (rising) powers and regionalism.

Varieties of Economic Regionalism

The concept of regionalism is as diverse as its object of study (see Börzel & Risse, 2016a; Söderbaum, 2016). There is no commonly accepted definition of what a region is. Most would agree that a region implies some “geographical proxim­ity and contiguity” (Hurrell, 1995, p. 353) and mutual interdependence (Nye, 1965, p. vii). Some would add a certain degree of cultural homogeneity (Russett, 1967), sense of community (Deutsch, Burrell, & Kann 1957), or “regionness” (Hettne & Söderbaum, 2000). Regionalism, then, refers to processes and structures of region-building in terms of closer economic, political, security, and socio-cultural linkages between states and societies that geographically proximate. In IPE, regionalism is often synonymous with regional trade agreements (RTAs) as they are registered with the World Trade Organization (WTO; see Kim, Mansfield, & Milner, 2016; Mansfield & Milner, 1999; Mansfield & Pevehouse, 2013). Yet these agreements are not necessarily concluded between countries belonging to the same geographical space.1 Moreover, many of them are bilateral PTAs. The focus on PTAs has led to a neglect of deeper forms of economic regionalism, such as custom unions and economic or currency unions, which have equally proliferated over the past 25 years (see Börzel, 2013).

PTAs and Deeper Forms of Economic Regionalism

Most typologies of economic regionalism focus on the issue areas covered by regional agreements (trade and/or money) and the degree of interference with national authority on economic affairs (shallow vs. deep; see Balassa, 1973). The shallowest and most frequent form of economic regionalism is a preferential trade agreement (PTA) between two or more countries, which reduces (rather than eliminates) tariffs for certain products. A free trade area (FTA) is a PTA in which all barriers to trade are eliminated. Customs unions are FTAs with a common external tariff, which involves the delegation of some trade authority to regional institutions. Common or single markets go even one step further by providing not only for the free movement of goods but also of services, capital, and labor. The final stage of economic regionalism is the economic union, which complements the single market with the coordination of social, fiscal, and monetary policies (see Bhagwati, 1993). A monetary or currency union can but does not have to be part of an economic union. The depth of monetary regionalism can equally vary. While the pegging of a state’s currency to that of another state is a unilateral and informal commitment, currency boards maintain a fixed exchange rate with a foreign currency, e.g., the U.S. dollar or the euro. The deepest form of monetary regionalism is a currency or monetary union, in which several states share the same currency and establish a supranational central bank to set interest rates. If states use a foreign currency, this is referred to as dollarization (see McNamara, 2016).

IPE scholarship focuses on PTAs as the most prominent and prevalent form of economic regionalism. As of July 1, 2016 the World Trade Organization (WTO) reports 460 PTAs, of which 267 are currently in force.2 They liberalize trade between partner countries, granting preferential access to each other’s markets. About 40% do not have more than two members, which are in the majority of cases not contiguous either. About 50% are bilateral and/or include partners from distant regions. While PTAs as forms of shallow economic regionalism have been spreading, we also see a deepening of economic regionalism.

There are currently 18 customs unions (Table 1), of which two are also common markets (East African Community/EAC; EFTA-EU), and two decided to form economic union (Eurasian Economic Union/EEA; Caribbean Community/CARICOM) or an economic and monetary union (European Union/EU).3 Interestingly, of the six pure customs unions that are not bilateral, all but the Andean Community (CAN) and the Southern African Customs Union (SACU) aspire to become a common market (Gulf Cooperation Council/GCC; Southern Common Market/Mercosur; Association of Southeast Asian Nations/ASEAN) or even an economic and monetary union (West African Economic Community/ECOWAS). The GCC also intends to create a currency union, and ASEAN plans together with China, Japan, and South Korea (ASEAN +3) to establish an Asian Monetary Unit (Table 2; see Börzel, 2016; McNamara, 2016).

Table 1. Customs Unions, Common Market, Economic Unions, and Currency Unions

Customs union

Common market

Economic union

Currency union

Andean Community (CAN)

Association of Southeast Asian Nations (ASEAN)

ASEAN Economic Community (2025)

ASEAN Monetary Unit

Economic Community of West African States (ECOWAS)

West African Economic and Monetary Union (WAEMU)

West African Economic and Monetary Union;

West African Monetary Zone

Gulf Cooperation Council (GCC)

GCC single market

GCC single currency

Southern Common Market/Mercosur

Mercosur

Southern African Customs Union (SACU)

EU-Andorra

EU-Monaco

EU-San Marino

EU-Turkey

Israel-Palestine Authority

Switzerland-Liechtenstein

Pakistan-Afghanistan Union (APPTA)

East African Community (EAC)

East African Community (EAC)

EAC Monetary Union (2023)

European Economic Area (European Free Trade Area (EFTA)-EU)

Caribbean Community and Common Market (CARICOM)

Eurasian Economic Union

European Union (EU)

European Union (EU)

Source: Adapted from Kim, Mansfield, & Milner (2016). Grey shaded = planned.

Table 2. PTA Aspirations for Deeper Forms of Economic Regionalism

Customs union

Common market

Economic union

Currency union

Central American Integration System (SICA), formerly Central American Common Market (CACM)

Common Market for Eastern and Southern Africa (COMESA)

Economic Community of Central African States (ECCAS)

Economic and Monetary Community of Central Africa (CEMAC)

League of Arab States (LAS)

(Arab Customs Union)

League of Arab States (LAS)

(Arab Customs Union and Common Market)

Southern African Development Community (SADC)

Union of South American States (UNASUR)

Union of South American States (UNASUR)

Source: Adapted from Börzel (2013).

Ambitions for deeper forms of economic regionalism are particularly high in the Global South, where trade cooperation has been at best shallow. This raises some interesting questions for students of IPE. The political economy of low-income countries may explain ineffectiveness and failure due to the lack of tangible trade benefits. But why then enter into such agreements in the first place?

Deep Integration PTAs

Deep integration PTAs are a more recent form of deeper economic regionalism, which remain below a customs union or a common market but provide for “behind-the-border” trade liberalization, which involves at a minimum coordination and reaching as far as convergence of domestic trade–related regulatory systems (Maur, 2013). The WTO’s 2011 report, which was devoted to the significance of PTAs for the multilateral trading system, argued that “deep PTAs” are a significant new development in trade agreement design, shifting the main locus of trade liberalization away from tariffs and other “barriers at the border” to regulatory compatibility (WTO, 2011, pp. 145–146).

Deep integration as a concept has three main properties: (1) the liberalization of “behind-the-border” trade rules; (2) protection of foreign firms’ interests; and (3) harmonization of domestic regulatory systems for managing international production and trade (Kim, 2015). In the design of trade agreements, deep integration provisions involve harmonization or mutual recognition of regulatory areas in partner countries. These areas include but are not limited to investment regulations, intellectual property rights, competition policy, product and production standards, and technical regulations, among others. Deep integration commitments are essentially obligations toward “positive regulation,” in which countries agree to adopt actively domestic trade–related regulations to make their respective trade regimes WTO-consistent (Ostry, 2002, p. 11). This has, in effect, been the approach to liberalization under the WTO system. The “positive regulation” approach is a shift from the “negative regulation” of the GATT period, in which countries would choose whether or not to sign onto plurilateral agreements and simply made commitments not to raise trade barriers such as tariffs and quantitative restrictions.

The “depth” in deep integration PTAs can also be measured in terms of issue coverage and the strength of commitments made by signatories. The Design of Trade Agreements (DESTA) dataset provides an index of depth for 805 PTAs. Depth is measured as an additive index that combines scores in seven areas: whether all tariffs are eventually reduced to zero and whether the following six areas contain provisions for national treatment—services, investment, standards, public procurement, competition, and intellectual property rights (Dür, Baccini, & Elsig, 2014). Figure 1 shows the average depth of PTAs over time. Deep integration PTAs are indeed a phenomenon of recent years. The overall depth of PTAs has been increasing over time, and the trajectory has been consistently upward since about the mid-1980s. There is significant regional variation, however, in the depth of PTAs. Figure 2 shows the average depth in PTAs across six regions: Europe, Asia, the Americas, Africa, Oceania, and intercontinental PTAs that involve parties from different regions.4 Asia and intercontinental PTAs have seen the most dramatic increase in depth over time, though the takeoff in deep integration agreements appears to begin in the mid-1990s rather than earlier, as was the case for global trends (Figure 1). European PTAs and PTAs in the Americas also record high levels of depth in their PTAs, though there are more fluctuations over time. The Deep and Comprehensive Free Trade Areas (DCFTAs) the European Union seeks to establish as part of the Association Agreements it recently signed with Ukraine, Georgia, and Moldova and plans to negotiate with Morocco and Tunisia represent a new type of deep integration PTAs, which aim beyond the convergence of domestic trade-related regulatory systems including issues such as democracy and the rule of law (see Koeth, 2014).

The International Political Economy of RegionalismClick to view larger

Figure 1. Depth of Preferential Trade Agreements.

(Source: Baccini, Dur, & Elsig, 2014; authors’ calculations)

The International Political Economy of RegionalismClick to view larger

Figure 2. Depth of PTAs by Region.

(Source: Baccini, Dur, & Elsig, 2014; authors’ calculations)

What explains this variation in deep integration PTAs across regions? Trade has increasingly moved along the international supply chain, transferring intermediate goods and services across countries. Such production networks may promote deep PTAs, and in turn these agreements support and extend production network operations. At the same time, this begs the question of regionalism in Asia. Despite their advances in deep integration through PTAs, why do Asian countries not form regional institutions with proper dispute-settlement bodies or use existing ones? Likewise, why are there not more deep integration PTAs in Latin America or Africa, where production networks are also emerging and existing regional institutions have been little effective in facilitating positive regulation?

As we have seen, PTAs have been proliferating since the end of the Cold War. Interestingly, this surge is mostly driven by developing countries entering trade agreements with developed countries that are largely leading members of the Organization of Economic Cooperation and Development (OECD) or by developing countries signing trade agreements with other developing countries. Figure 3 shows the cumulative numbers of PTAs, differentiated among North-North PTAs, North-South PTAs, and South-South PTAs.5 The number of South-South PTAs in the global trading system has been increasing, and the steepest rise in PTAs can be seen since the 1990s. North-South PTAs have also been increasing since the 1990s, though the numbers are nowhere near those of South-South PTAs. The number of North-North PTAs has remained more or less constant throughout. The rise of South-South PTAs presents opportunities for fruitful research on many fronts, including but not limited to the emergence of production networks and the building of regional institutions to manage trade and investment.

The International Political Economy of RegionalismClick to view larger

Figure 3. PTAs in the Developing World.

(Source: Baccini, Dur, & Elsig, 2014; authors’ calculations)

South-South PTAs are not new (Figure 1; see Bhagwati, 1993). During the first wave of regionalism in the 1950s, when economic integration took off in Europe, developing countries formed their own PTAs in Africa and Latin America. Their main purpose was to reduce the dependence of developing countries on advanced industrial countries. Particularly in Latin America, these PTAs erected extensive trade barriers as part of an import substitution industrialization strategy to protect domestic industry from external competition. While often being ambitious in name and objectives, the Latin American Free Trade Association (1960), the Central American Common Market (1961), the Caribbean Community and Common Market (1973), and the East African Community (1967) did little to foster trade liberalization among their members (Bhagwati, 1993; Bianculli, 2016; Hartmann, 2016). After the end of the Cold War, South-South PTAs saw a remarkable revival, with the formation of new or the reestablishment and deepening of existing agreements (Börzel, 2013). While many of them are as ambitious as they were in the 1960s and 1970s, implementation has remained an issue (Haftel, 2012). Most have still not managed to realize mutual market access, not to mention a common external tariff, the free movement of goods and services, or the coordination of economic and monetary policies they aspire to. Developing countries have also been reluctant to enter deep integration PTAs. If they do, it is with OECD countries (Maur, 2013). Economic regionalism in the Global South, hence, continues to be ambitious but shallow.

North-South PTAs used to be mostly formed between the European Union and the former colonies of its member states (Panagariya, 2002). This changed in the 1990s. The North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States set the tone for a new type of North-South PTAs, which aim at promoting free trade to support the integration of developing countries into the global economy (Schiff & Winters, 2003). At the same time, such agreements help protect vertical intra-industry trade based on differences in factor prices (Manger, 2009).

Mega-PTAs: Regionalism in the Making?

In the evolution of regionalism through PTAs, perhaps the most significant and politically charged development is the mega-PTA, an umbrella trade agreement that not only includes numerous members but comprises a large part of global trade. As of the time of writing, the Trans-Pacific Partnership (TPP) has been signed (2015) and has moved onto the ratification process in member countries. Negotiations for the Transatlantic Trade and Investment Partnership (TTIP), between the United States and the European Union, and the Regional Comprehensive Economic Partnership (RCEP) agreement, involving the ten member states of the Association of Southeast Asian Nations (ASEAN) as well as the six states with which ASEAN has existing FTAs, are ongoing. These mega-PTAs will be significant new “actors” in regionalism. In terms of sheer size, they include numerous existing PTAs already concluded by members. In economic terms, the TPP countries, for example, comprise approximately 40% of global gross domestic product (GDP) and one-third of global trade. The two members of TTIP constitute one-half of global GDP and one-third of global trade. The RCEP already covers the largest free trade area by population—the China-ASEAN Free Trade Area—and includes an additional six economies in the Asian region. After the election of Donald Trump as the 45th U.S. president, RCEP currently appears to be the only mega-PTA that stands a chance to become reality.

To be sure, mega-PTAs are not all that new. In 2008, one of the first mega-PTAs formed in sub-Saharan Africa. The East African Community (EAC), the Southern African Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA) signed an agreement with the aim of creating an African Free Trade Zone (AFTZ). The merger of the three trading blocs would consist of 26 countries and constitute 58% of the continent’s GDP. The African Union in 2012 encouraged the Economic Community for West African States (ECOWAS), the Economic Community of Central African States (ECCAS), and the Arab Maghreb Union (AMU) to enter into similar talks.6 The AFTZ is expected to be operational in 2018. It resembles the Free Trade of the Americas (FTAA) Initiative of 1994, which was to integrate NAFTA with several Latin American trade agreements, including Mercosur, by 2005 (Panagariya, 2007). Like the AFTZ, however, FTAA appears to have stalled.

The current literature on regionalism has only begun to investigate mega-PTAs, perhaps because they are still under negotiation or have not gotten anywhere in the past. Why have states turned to mega-PTAs if they prove so difficult to negotiate and ratify? What model(s) of trade governance do these arrangements provide? Do these mega-PTAs advance competing models, or are these parallel agreements with overlapping membership for some countries?

To conclude, the mapping of economic regionalism has not only shown that there is an increasing variety of PTAs. Next to their general proliferation, we find a deepening of regionalism in terms of the formation of customs unions, common markets, and economic unions, on the one hand, and the entering of deep integration PTAs, on the other. Moreover, we see a push toward a new form of regulatory coordination through mega-PTAs. The next section will explore to what extent existing IPE scholarship can account for these developments in economic regionalism, which have mostly evolved outside the “OECD world,” in which and for which most theories have been developed.

Explaining the Formation, Proliferation, and Evolution of PTAs and Their Varieties

The extensive scholarship on the political economy of PTAs has produced important insights into the sources and consequences of PTAs and of regionalism more broadly. On the political economy of PTA formation, the key factors are regime type and veto players. Democracies are more likely to enter into PTAs, while countries with a larger number of veto players are likely to face greater difficulties. On the consequences of PTAs, scholarship has been informed by the long-standing debate on trade creation versus trade diversion that goes back to Viner’s first formulation (Viner, 1950). This section reviews the major arguments and findings of the literature in these areas and discusses to what extent they capture the formation, proliferation, and evolution of PTAs and their varieties. We will argue that existing approaches do a fairly good job but should consider additional political drivers of economic regionalism, such as locking in domestic reforms and ensuring regional stability, which are particularly relevant to the formation of PTA in the Global South. Moreover, the IPE literature has yet to fully explore the relevance of diffusion processes, particularly when it comes to explaining the proliferation and the institutional design of PTAs.

Regime Type and Veto Players

An important body of research on the political economy of PTA formation and implementation has focused on the compatibility of political institutions in partner countries. To the extent to which “homophily” prevails among trading partners with similarities in their political institutions, these countries are also more likely to form a PTA (Hurrell, 1995, pp. 68–71). This line of research emphasizes the influence of two institutional features on PTA formation: regime type and veto players (Mansfield & Milner, 2012; Mansfield, Milner, & Pevehouse, 2007; Mansfield, Milner, & Rosendorff, 2002).

On regime type, the main argument is that democratic leaders have an incentive to sign PTAs because they provide information about leadership and performance. The premise is that it is difficult for voters to distinguish between the government’s poor performance in managing the economy and events that are beyond the government’s control. In order to avoid a scenario in which voters may vote a government out of office for reasons beyond its control, governments have an incentive to sign PTAs because these agreements offer reliable information to voters about the behavior of the home government and the governments in PTA partner countries. PTAs thus provide democracies with the institutional mechanism to make information available to voters. In non-democracies, however, governments have less incentive to enter into PTAs because electoral imperatives are far less pressing. Democracies are thus more likely to enter into PTAs than autocracies. Governments of democracies can increase political support through PTAs, while autocratic governments have less incentive to do so.

There are many examples to support the argument that democracies are more prone to enter PTAs than autocracies (Mansfield & Milner, 2012). But how do we explain the increasing number of non-democratic countries in sub-Saharan Africa, the Middle East, and Asia forming PTAs and seeking deeper forms of economic regionalism?

South-South and North-South PTAs involving non-democracies are less of a puzzle for the second argument on political institutions, which focuses on the role of veto players for PTA formation. Mansfield et al. (2007), and subsequently Mansfield and Milner (2012), have argued that as the number of veto players increases, the more unlikely governments are to sign PTAs. The theoretical foundation for veto players relies on their role as agents whose agreement is required for policy change and who have the capacity to block such alterations in policy (Tsebelis, 2002). Power-sharing institutions generate the potential for veto players, and policies become difficult to change as the number of veto players increases. A larger number of veto players increases the possibility of divergence in preferences and the durability of the status quo or, in the extreme, policy stagnation.

Applied to the politics of PTAs, given that they are likely to require trade policy change in member countries, the likelihood of governments entering into these agreements depends as much on the number of veto players as on the dynamics of intergovernmental bargaining. Existing research has yet to examine just how (and how much) such veto players affect the formation and design of PTAs. After all, according to the “paradox of weakness” (Schelling, 1980), the higher the number of veto players, the greater the bargaining power of a government for obtaining its preferred outcome (see Putnam, 1988). Nevertheless, the insights of this body of research emphasize the difficulty of forging agreements when governments must take account of domestic actors with diverse preferences and the ability to block policy change or even the conclusion of trade agreements. Mansfield and Milner (2012) find that a greater number of veto players reduces the prospects for international cooperation decreases the range of agreements concluded by governments. These findings should particularly hold for deep integration PTAs, since they are likely to carry higher, more concentrated adjustment costs. The signing of the Comprehensive Economic and Trade Agreement (CETA), which the European Union and Canada had negotiated for more than seven years, almost failed in the last minute amid the opposition of Wallonia, a small region in Belgium.

In sum, democracies have greater incentives to form PTAs but more difficulties in getting them accepted at the domestic level in the presence of large numbers of veto players. Mega-PTAs, such as TTIP and TTP, with their difficult negotiations and growing domestic opposition, corroborate this argument. But why then do we find an increasing number of non-democracies entering PTAs when the implementation of PTAs is more effective in democracies than in non-democracies (Haftel, 2012)? There are obviously other factors than economic benefits that drive non-democratic developing countries toward economic regionalism (see below).

Future research on the political economy of regionalism should also examine more closely the role of multinational corporations (MNCs), especially as firm heterogeneity has emerged as an important factor for trade liberalization (Plouffe, 2015). MNCs are political actors that engage both home and host governments to support their operations in regional and global production networks. They have been identified as key drivers of deep PTAs (Kim, 2015). The incentives of MNCs to protect their trading and production networks have also contributed to the surge of North-South PTAs since MNCs often maintain contractual ties to local suppliers in both northern and southern countries. These types of PTA face less domestic opposition than PTAs formed to realize advantages of inter-industry trade based on comparative advantage, and also because governments of developing countries can expect an inflow of foreign direct investment (Manger, 2009). The current scholarship has only begun to examine in greater depth the role of firms and global supply in trade disputes (Jensen, Quinn, & Weymouth, 2015) and the protection of investment (Johns & Wellhausen, 2016).

Lock-In, Regional Stability, and Signaling

Locking in domestic reforms, curbing negative externalities of neighbors to ensure regional stability, and signaling credible commitment to attract foreign aid and trade are powerful rationales for the formation and deepening of PTAs (see Börzel & van Hüllen, 2015). The literature on international democracy promotion established a link between the democratic quality of states and their membership in regional organizations (Pevehouse, 2005, 2016). States use regional organizations to “lock in” democratic developments through deeper forms of regional cooperation and integration, entailing judicial litigation and sanctioning mechanisms. A prominent example often referred to in the literature is the post-communist countries of Central and Eastern Europe that sought membership in the European Union after their transition. Likewise, Mexican President Salinas de Gortari used NAFTA to lock in the political and economic reforms his government had introduced (Duina, 2015; Mansfield, 2013).

Locking in domestic reforms may also work for authoritarian governments; they instrumentalize their membership in regional organizations to boost the sovereignty and legitimacy of their regimes (Levitsky & Way, 2010; Söderbaum, 2004). Institutional lock-in at the regional level is not only about committing successor governments to domestic reforms, democratic or otherwise. It can also provide a signaling device by which incumbent regimes seek to publicly commit themselves to certain institutions that external donors or investors care about. Domestic and regional stability are important for attracting capital and technology. After all, autocratic rulers often rely on economic prosperity for their domestic legitimacy (Solingen, 2008). Finally, coups d’état and massive human rights violations may produce substantial negative externalities for neighboring countries. Flows of refugees or rebel forces often challenge the stability of an entire region.

African, Latin American, Arab, and Asian leaders, democratic or not, have formed and deepened South-South and North-South PTAs as a way to control, manage, and prevent regional conflict and deal with non-traditional security threats or as a source of domestic power and consolidation of national sovereignty (Acharya, 2011; Barnett & Solingen, 2007; Caballero-Anthony, 2008; Graham, 2008; Herbst, 2007; Okolo, 1985). This is in line with IPE studies, which have not only shown how PTAs affect trade flows and foreign direct investment, they also established their influence on human rights promotion, environmental policy coordination, or the outbreak of military conflict (Büthe & Milner, 2008; Frankel, 1998; Hafner-Burton, 2009; Mansfield & Pevehouse, 2000). Yet research has yet to come to terms with the ineffective implementation of many South-South agreements. If they are to lock in domestic reforms, ensure the stability of a region, and increase its attractiveness for foreign trade and aid, they have to be effective.

Economic Statecraft and Political Power

The international politics of economic regionalism has become even more relevant as we observe the rise of China and emerging markets. How economic exchange affects political power is perhaps the central question in examining the relationship between international politics and PTAs. Gowa and Mansfield have argued that the gains from trade can be directed toward enhancing a state’s political-military capacity. Countries must confront the security externalities of trade, and they do so by trading more and more freely with allies than with other states (Gowa, 1994; Mansfield, 1993). Gowa argues, in particular, that allies form PTAs to increase political-military capacity that ultimately serve common security goals. Brazil and Venezuela have championed Mercosur to counterbalance U.S. influence in Latin America (Gomez Mera, 2005; Tussie, 2009). A similar competition between two states for containing external powers through promoting regionalism can be observed between Iraq and Egypt in the League of Arab States (Khadduri, 1946), Malaysia and Indonesia in ASEAN (Dent, 2008, pp. 86–88), Japan and China in East Asia (Beeson, 2006), Nigeria and South Africa in sub-Saharan Africa (Francis, 2006), and Russia and Uzbekistan in Central Asia (Kubicek, 1997).

The historical record is rich with numerous examples of economic arrangements, including PTAs, which serve as tools of foreign policy to foster cooperation among allies and economic dependence for strategically important trade partners. TTP has been important not only for promoting economic integration across the Pacific but also for its strategic importance as the economic arm of the Obama administration’s “pivot” to Asia. The origins and design of the GATT also reflect the great power politics of the Cold War in the early post–World War II period, in which the United States crafted trade concessions to support the reconstruction of Europe as a bulwark against communism (Gowa & Kim, 2005; Kim, 2010). Scholarship on the interwar period also shows the prevalence of hub-and-spoke configurations in regional arrangements, centered on a large leading economy and its smaller and more dependent trading partners (Pomfret, 1988). Especially in the era of the Great Depression, groups such as the gold bloc centered on France, the sterling bloc led by Great Britain, and the Reichsmark led by Germany not only intensified trade discrimination but enhanced the position of the leading economies. Major powers thus employed regional arrangements in hub-and-spoke configurations to enhance their positions in European power politics in the interwar period (Eichengreen & Frankel, 1995), whose impact persisted well into the GATT period (Gowa & Kim, 2005).

Regional economic arrangements during the Cold War also served to consolidate the respective spheres of influence for the Soviet Union and the United States. The Soviet Union established the Council for Mutual Economic Assistance (CMES) to link the economies of its Eastern European satellites during the Cold War, while the United States launched the Caribbean Basin Initiative and the European Community members concluded trade arrangements with former colonies. Weaker states have used PTAs as a power lever, too. Latin American countries, for example, established PTAs over the past decade to improve their leverage in negotiations with the United States and NAFTA. Likewise, the EU’s original members believed that its creation would enhance their bargaining power in negotiations with the United States, and participants in the Central European Free Trade Area hoped its formation would bolster their ability to negotiate entrance into the EU (Haggard, 1997; Whalley, 1998, p. 72).

While these cases support the argument that trade agreements increase state power and state capacity, another line of argument emphasizes the ability of regional (economic) institutions to constrain power. The well-known example of the European Community and its subsequent institutional forms is illustrative of this argument, in which deeper economic regionalism served to constrain Germany’s behavior in the region (Grieco, 1996; Katzenstein, 1997). Moreover, powerful states have facilitated the formation and proliferation of PTAs in pursuit of economic or geopolitical interests. The United States, China, Russia, South Africa, and Nigeria have supported and engaged in economic regionalism in order to strengthen military alliances, promote stability in neighboring countries, or secure access to new markets, cheap labor, water, and energy resources (Antkiewicz & Whalley, 2005; Clarkson, 2008; Coleman, 2007, pp. 155–184; Gowa, 1994). Yet, while hegemonic leadership may help initiate and promote regionalism, powerful states are not always willing to act as hegemons, as we will discuss in the final section of this article (Destradi, 2010).

Diffusion and Economic Regionalism

IPE scholarship has developed powerful explanations for the formation of PTAs. They are largely based on functionalist-rationalist logic, focusing on economic interdependence, election politics, or balance of power as factors shaping state preferences for economic regionalism. If this logic is broadened to accommodate political rationales, such as locking in domestic reforms or ensuring regional stability, IPE approaches also apply to PTA formation in the Global South. Where they have difficulties is coming to terms with the deepening of economic regionalism, such as the evolution of rather shallow PTAs into deep integration PTAs, customs unions, common markets, or economic and monetary unions. Deeper economic regionalism does not necessarily correlate with stronger economic interdependence or political-military alliances as the comparison of Northeast Asia, sub-Saharan Africa, and Latin America clearly demonstrates (see Börzel & Risse, 2016c). How do we explain then the uneven proliferation of deeper forms of economic regionalism?

The IPE literature has started to acknowledge the role of strategic interdependence—or diffusion—for the spread of (deeper) PTAs (Baccini & Dür, 2012; Baccini, Dür, & Haftel, 2014; Baldwin & Jaimovich, 2012; de Melo & Panagariya, 1995, pp. 5–6; Fernández & Portes, 1998; Oye, 1992; Pomfret, 1988; Yarbrough & Yarbrough, 1992). Various studies point out that, for example, the European Free Trade Area (EFTA) was created in response to the European Economic Community (Pomfret, 1988, pp. 161, 178). Furthermore, some observers have argued that NAFTA stimulated the establishment of bilateral economic arrangements in the Western Hemisphere and in the Asia-Pacific region (Grossman et al., 1997, pp. 8–9; Solis, Stallings, & Katada, 2009). Baldwin’s (1995) “domino theory of regionalism” is designed to explain how the EU and NAFTA have prompted the formation of various other PTAs (Baldwin, 1995). Among the explanations offered for this recent tendency is that a PTA’s establishment can prompt fears by third parties that the agreement would undermine their competitiveness, thereby inducing them to form a rival bloc (Means, 1995). Similarly, a state entering an existing PTA may provoke concern on the part of its economic rivals that they will be placed at a competitive disadvantage in international markets unless they respond in kind (Pomfret, 1988; Solis et al., 2009; Yarbrough & Yarbrough, 1992). In addition, PTAs might form and expand in reaction to one another because they usually have more aggregate market power and thus more bargaining power than their constituent members (Fernández & Portes, 1998; Mansfield & Reinhardt, 2003; Oye, 1992).

These arguments are highly plausible but apply to any type of PTA. Since shallow and deep economic regionalism still exists side by side, we need to explain why deeper forms of regionalism have proliferated more in some regions than in others. Diffusion research has identified a series of mechanisms by which the decision of one state may influence the propensity of another state to adopt a similar decision (Risse, 2016; Simmons, Dobbin, & Garrett, 2006). Competition and functional and normative emulation certainly help explain why groups of states have engaged in deeper forms of economic regionalism in the absence of functional pressures, such as growing interdependence, or power politics. However, diffusion approaches still have little to say about when states decide to follow others because of fear for their competitiveness or the need for a more effective or legitimate form of cooperation. Moreover, which model do they try to emulate? U.S. and EU PTAs diverge in their respective models. EU agreements tend to have stronger competition policy provisions, and U.S. agreements emphasize labor and environmental standards (Horn, Mavroidis, & Sapir, 2010). Kim and Manger (2016) investigate the path-dependent adoption of the United States’ negative-list approach to services liberalization. Baccini et al. (2014) show that PTAs with member states that have close relations to the United States are more likely to adopt the NAFTA model. Duina (2006) argues that differences in the underlying legal architecture of the EU, NAFTA, and Mercosur affected the models of PTAs adopted by countries in their respective neighborhoods. The variation in models and their diffusion have the potential to shape the evolution of distinct regionalisms in the international economy. But we still have to identify the conditions under which what model diffuses where and through what mechanism (see Risse, 2016).

Rising Powers, Emerging Markets, and the Future of Regionalism

The international political economy of regionalism, as is international politics more broadly, is influenced by rising powers, that is, emerging actors from the developing world that are increasingly taking on a more prominent and powerful position in the governance of the international economy. The most well-known grouping is the BRICS—Brazil, Russia, India, China, and South Africa—and joining them are the rest of the non-OECD members of the G-20 group, the N11 countries, and the MINT countries. Together they comprise the emerging market economies (EMEs) that have a consistent record of strong economic growth and are potential key players in major international institutions, from the WTO to the IMF and PTAs.

Among these emerging actors, the BRICS countries, in particular, are regional powers that seek to shape regionalism in their respective regions. India’s leadership in the South Asian network of institutions such as the South Asian Preferential Trade Area (SAPTA), the South Asian Association for Regional Cooperation (SAARC), and the The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMTSEC); Brazil’s position in MERCOSUR; and Russia’s central role in the Eurasian Economic Union (EAEU) are all indicative of their influential positions. China as the world’s second largest economy after the United States has also become a key actor in Asian regionalism as a leading member of the Shanghai Cooperation Organization (SCO), the recently launched Asian Investment Infrastructure Investment Bank (AIIB), and the Regional Cooperation Economic Partnership (RCEP) agreement currently under negotiation. The prominence of the BRICS countries in their respective regions raises several important questions regarding the relationship between rising powers and the international political economy of regionalism.

First, how important is regionalism to these emerging markets and rising powers? Brazil has been ambivalent about pushing regional institution building in Latin America (Spektor, 2010). India appears to have aspirations for regional leadership but has so far refrained from developing a vision for how to create stability in the conflict-ridden region (Destradi, 2012). South Africa has used its economic power to actively shaped the Southern African Customs Union (SACU) but has played a more ambivalent within Southern African Development Community (SADC) (Lorenz-Carl, 2013; Muntschik, 2013). China’s approach to regionalism may well be instrumental and designed to serve the broader international goal of establishing its position as a global actor and, in the area of economic exchange, the goals associated with its “One Belt, One Road” policy that would link China with Europe along the trade routes of the old Silk Road. The variation in priorities accorded to regionalism by these regional powers is an important avenue for further scholarship. Identifying variation and its sources through a comparative regionalism perspective (Börzel & Risse, 2016b) will further advance our understanding of how regional powers will negotiate the links between regionalism and multilateralism.

Second, do rising powers offer competing forms of regionalism? Rising powers may prefer both continuity and change in the pursuit of their goals through international institutions. The reform of IMF quotas or the inclusion of the China’s renminbi in the basket of SDR currencies are indicative of within-institutional changes to accommodate the global shift in power. As such, they play to the theme of continuity in international institutions and raise questions concerning the factors affecting institutional change and development. At the same time, however, China and other EMEs have formed alternative institutions for economic governance: the BRICS Bank and, more recently, the AIIB. These new institutions essentially replicate the functions of existing institutions, and they also feature the emerging actors of the BRICS and beyond in their leadership.7 They also have the strong potential to drive economic governance in a competitive direction, offering alternative forms of governance from the traditional leading economies.

The link between rising powers and regionalism is fertile ground for new scholarly developments in the international political economy. We conclude this article with the questions raised by the “global shift” in power, driven by fundamental changes in the cast of actors that are drivers in the international economy.

Conclusion

This article has provided a broad overview of the main lines of scholarship concerning the international political economy of regionalism. Regionally based intergovernmental institutions play a major role in establishing, facilitating, and enforcing cooperation between states, and PTAs and other regional economic organizations have been among the most prominent and visible institutions of recent years.

The last section is devoted to the “frontier” of scholarship on regionalism: the role of rising powers the emerging market economies such as the BRICS countries that are increasingly important players in economic governance. We call for scholarship on questions such as how important regionalism is for these rising powers, how they have influenced regionalism, and whether their priorities lie in regional or global governance issues. We argue that identifying variations in the link between rising powers and regionalism is a key challenge for future research.

The scholarship on the international political economy of regionalism remains relevant and important for understanding the evolution of the international economy and its governance. The bulk of international trade now moves along the international supply chain and global and regional production networks. How governments coordinate with others in managing them determines the future course of regionalism, toward supporting either a more open international economy or a fragmented and possibly discriminatory configuration of regional groups. The increasing numbers of South-South and North-South PTAs and the emergence of mega-PTAs such as the TPP, TTIP, and RCEP provide fertile ground for scholarship on the drivers of regionalism and their consequences for trade, investment, and other forms of economic exchange.

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Notes:

(1.) RTAs are forms of preferential trade liberalization, which by definition cannot be global. See Article of GATT 1994 (World Trade Organization 2016a).

(2.) The numbers are drawn from the WTO database on regional trade agreements (RTA) (World Trade Organization 2016b).

(3.) The information was obtained from Kim, Mansfield, and Milner (2016) and was updated using the RTA database of the WTO.

(4.) The regional classifications are those employed in the DESTA dataset, and the figures show the average annual depth of PTAs in which signatories come from the same region. The intercontinental PTAs, in contrast, include PTAs that are signed by signatories of different regions.

(5.) North and South classifications are those of the DESTA dataset: countries of the North include the United States, Canada, Western European countries, Japan, Australia, and New Zealand; all others are classified as countries of the South.

(7.) The recently launched AIIB led by China, for example, is a lender for developing funding and offers an alternative to the Asian Development Bank (ADB) led by Japan and the United States. Neither Japan nor the United States has joined the AIIB, for reasons of lack of transparency in the decision-making process. Such key differences are indicative of the disparity in governance models advanced by the new institutions. In the area of foreign aid, the question of emerging donors as providers of “rogue aid” (Dreher & Fuchs, 2015; Dreher, Nunnenkamp, & Thiele, 2011) has been the subject of extensive debate.