Trading Blocs: Good or Bad for Nations?

TRADING blocs are springing up, enlarging, or otherwise developing all over the world.

In May, the presidents of Guatemala, Honduras, and El Salvador agreed to lift tariffs on 10,000 items by the end of the year and work toward a customs union.

Last month, the presidents of Argentina, Brazil, Paraguay, and Uruguay signed a timetable for synchronizing foreign trade, tax, and exchange-rate policies in readiness for the 1995 start-up of a common market, named "Mercosur." Israel and China just signed a free-trade agreement that aims to eliminate all duties and quotas on trade between the two countries over the next three years. The 12-nation European Community agreed June 28 to negotiate accession for Austria, Sweden, Finland, and Switzerland once its own Maastricht union treaty is ratified.

Even the former communist nations are getting into the act. Eleven of them, including six former Soviet republics, signed a Black Sea economic cooperation declaration June 25.

"It doesn't amount to a hill of beans," says Federal Reserve Bank of Boston economist Norman Fieleke of the agreement by Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, and Ukraine. Their statement talks of free circulation of people, goods, and services along the lines of the European Community. But Mr. Fieleke notes: "There are oftentimes discussions about these things and they don't emerge."

Nonetheless, he has made a list of 23 trading arrangements involving 119 countries.

Altogether, these nations account for some 82 percent of international trade in goods.

Each such deal involves some trading preference for its own members, some discrimination against outside nations.

"No region is free from such arrangements," writes Fieleke in the New England Economic Review.

"Indeed, one would be hard pressed to find even one country that does not receive from, or grant to, other countries some form of explicit preferential treatment in international trade," he adds.

Fieleke says trading blocs are "an inferior substitute" for multilateral pacts, such as those under the General Agreement on Tariffs and Trade. Under GATT, a trade concession by one nation must be granted to all of the more than 100 members of GATT.

Contrariwise, Jeffrey Schott, an economist with the Institute for International Economics in Washington, says regional blocs can be complementary to the GATT system.

Jeffrey E. Garten, an investment banker with the Blackstone Group in New York, asks if divisive forces in the world are so strong today that it is impossible to head off this tendency toward the formation of trade blocs. Whether these blocs are good or bad is "a real question," says Mr. Garten, author of a new book, "A Cold Peace: America, Japan, Germany, and the Struggle for Supremacy."

Earlier this month, the leaders of the seven largest industrial democracies, at their meeting in Munich, apparently managed to advance somewhat the prospects for a successful conclusion of the Uruguay Round of trade negotiations under GATT. But if the talks fail, Garten expects that it will be easier for trade blocs to develop more momentum than they would otherwise.

Should that happen, Fieleke hopes that "truly liberalized trade" within the blocs could improve the general welfare of the world.

"To set the best example for the rest of the trading world, they should be receptive to new members, for the ideal free trade area is worldwide in scope," he argues.

Garten's concern is that the United States is unprepared for rapid liberalization of trade, such as if the North American Free Trade Agreement is approved this year, resulting eventually in free trade with Mexico as well as Canada.

"The United States hasn't done anything to prepare itself," he says.

Many US workers, says Garten, are not educated enough to take on high-tech jobs when low-tech jobs are lost to countries with low wages. Freer trade, he says, "is making losers out of a lot of people."

Nor has the US government, in cooperation with the private sector, devised an economic strategy for dealing with increasing international competition, as have Japan and Germany, Garten says.

He expects that the US will reexamine the premise that an even more open market is in the national interest. The real need is for the US to strengthen the base of its economy, he holds.

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