1.1.2. Liberalisation by regional integration

The number of regional trade zones and unions notified with GATT substantially increased during the 1980s and 90s. From the point of economic theory, their effect on world trade is ambivalent, their net effect depending on the size of trade-creating effects within the regional agreement and the size of trade-diverting effects in relationship to trading partners who are not members of the zone (Viner 1950). Every regional trade association needs to be notified with GATT because – due to its regional focus – it is not in compliance with the GATT principles of most-favourednation clause and non-discrimination. Regional trade associations are built on the principle of discriminating between members and non-members on the basis of geography. When GATT was founded, it was hoped that regional trade associations would be an intermediate step towards worldwide integration. This is why an exception was built into GATT rules right from the outset.

In practice, regional trade associations have led to substantial liberalisation between member states in the past two decades. The European Union is clearly the most remarkable example, which has had enormous effects with regard to liberalisation and deregulation: the completion of the Common Market with the four basic freedoms (with regards to goods, services, capital, and settlement) was a very important step. By further reducing state-mandated barriers to trade, it has led to a significant decrease in international interaction costs.

The introduction of a single European currency has further reduced relevant transaction costs. The trade-creating effects are further amplified by the recent round of accession. In the medium term, they might further increase by the possible membership of Bulgaria, Romania, Croatia, the former Yugoslavia, Albania and possibly even Turkey. Additionally, many of the integration effects also apply to the EEA (i.e., to Norway, Iceland and Liechtenstein).

In North America, the North American Free Trade Association (NAFTA) has led to intensified economic integration between Canada, the U.S. and Mexico. In South America, Mercosur (currently comprising Argentina, Brazil, Paraguay and Uruguay) has not been quite as successful. There are various plans for regional integration associations combining the states of the Americas in one organisation. In other parts of the world, activities to reach higher levels of regional integration have also intensified everywhere over the last decade.