TRADE POLICIES &

REGIONALIZATION
INTRODUCTION
Trade policies and regionalization are interconnected concepts that play a significant role in shaping
international trade and economic relationships among countries. For more than a decade, experts have
been predicting a shift to more regionalized trade patterns, as companies adopt nearshoring strategies
to produce goods closer to the markets where they will be sold. Many expected Covid-19 to fast track
this trend. The potential for large increases in trade regionalization is also constrained by the fact that
trade is already quite regionalized. Using most regional definitions, more than half of world trade
happens inside regions.
INTRODUCTION
• Trade Policies: Trade policies are government regulations and measures that influence the flow of goods,
services, and investments across international borders. These policies can be categorized into various types,
including tariffs (taxes on imports), non-tariff barriers (regulations, quotas, and licensing requirements), and
trade agreements (bilateral, regional, or multilateral).

• Regionalization: Regionalization refers to the process of countries forming regional economic integration
agreements or blocs. These regional agreements aim to promote trade, cooperation, and economic integration
among member states within a specific geographic region. Common examples of regionalization include the
European Union (EU), North American Free Trade Agreement (NAFTA, now replaced by the United States-
Mexico-Canada Agreement or USMCA), and the Association of Southeast Asian Nations (ASEAN).
T R A D E P O L I C I E S A N D R E G I O N A L I Z AT I O N I M P L I C AT I O N S

• Customs Unions and Free Trade Areas: Regionalization often involves the creation of customs
unions or free trade areas where member countries agree to reduce or eliminate tariffs and trade
barriers among themselves. For example, the EU established a customs union with a single
external tariff, allowing for seamless trade within the union while collectively negotiating trade
agreements with non-member countries.

• Harmonization of Trade Policies: Regional agreements often require member countries to harmonize their
trade policies. This means adopting common standards, regulations, and trade rules to facilitate trade within
the region. The goal is to create a more consistent and predictable trade environment.
T R A D E P O L I C I E S A N D R E G I O N A L I Z AT I O N I M P L I C AT I O N S

• Trade Diversion vs. Trade Creation: Regionalization can lead to both trade creation and trade
diversion effects. Trade creation occurs when member countries start trading more with each other
because of reduced trade barriers. However, trade diversion happens when they divert trade from
more efficient non-member countries to less efficient member countries due to preferential
treatment within the region.

• Rules of Origin: Trade agreements within regional blocs typically have rules of origin to determine whether
a product qualifies for preferential treatment. These rules specify the criteria that a product must meet to be
considered as originating from within the region. This prevents third countries from taking advantage of
preferential trade agreements by transshipping goods through member countries.
T R A D E P O L I C I E S A N D R E G I O N A L I Z AT I O N I M P L I C AT I O N S

• Negotiating Power: Regionalization enhances the negotiating power of member countries in global
trade negotiations. By forming a bloc with a unified stance, these countries can leverage their
collective strength to negotiate more favorable trade deals with non-member countries or regions.

• Spillover Effects: Regionalization can have spillover effects on trade policies beyond the region. It
may encourage non-member countries to align their trade policies with regional standards to access
the lucrative regional markets.

• Global Trade Dynamics: The proliferation of regional trade agreements has led to a complex web of
trade relations globally. This can create challenges for businesses trying to navigate varying trade
rules and regulations across regions.
G E N E R A L A G R E E M E N T O N TA R I F F S A N D T R A D E

• Governments typically view exports as good (because they create jobs in the country) and imports
as bad (because they cause job losses in the country). Consequently, governments may be tempted
to build trade barriers to discourage imports. But if every country does so, international trade is
damaged. To avoid this problem, the General Agreement on Tariffs and Trade was signed after
World War II. Its purpose was to reduce or eliminate trade barriers, such as tariffs and quotas, by
encouraging nations to protect domestic industries within agreed-upon limits and to engage in
multilateral negotiations.

• Although 92 countries signed the GATT, not all complied with its rules. The United States was one of the
worst offenders. A revision of the GATT went into effect in 1994, but many issues remained unresolved—for
example, the opening of foreign markets to most financial services.
W O R L D T R A D E O R G A N I Z AT I O N
• On January 1, 1995, the World Trade Organization came into existence as the successor to GATT.
The 164 member countries are required to open markets to international trade, and the WTO is
empowered to pursue three goals:
1. Promote trade by encouraging members to adopt fair trade practices.

2. Reduce trade barriers by promoting multilateral negotiations.

3. Establish fair procedures for resolving disputes among members.

W O R L D T R A D E O R G A N I Z AT I O N
• The WTO is overseeing reductions in import duties on thousands of products that are traded
between countries. Canada, the United States, and the European Union are founding members of
the WTO. Unlike the GATT, the WTO’s decisions are binding, and many people feared that it
would make sweeping decisions and boss countries around. Those fears were overstated. The WTO
has served its role as a ruling body, but appeals can often drag on for years.
• It is a place to file complaints and to be heard in a civilized setting. For example, the United States
has filed complaints to the WTO against B.C. wine sales practices, noting that only local wines can
be sold in grocery stores in British Columbia. The United States sees this as an unfair advantage.
While that case may drag on for a long time, each country is free to take its own actions.
WORLD TRADE ORGANIZATION
• Canada was not content to wait for the WTO to deal with the U.S. steel and aluminum tariffs. In a
clear act of trade retaliation, it threatened to put tariffs on California wine and maple syrup from
Vermont as tensions grew. A short time later, the Canadian government followed through with
tariffs on a strategic list of products, including maple syrup, whiskey, orange juice, and chocolate.
• Despite all this protectionist momentum, new free trade agreements are promising to change the
landscape once again (see upcoming descriptions of the RCEP and CETA). Many senior trade
officials are openly questioning the long-term relevance of the WTO if the members don’t adjust.
Many of the new agreements have more modern, faster rules, such as better coordination of
standards and regulations (which sometimes act as obstacles to trade).
 THE EUROPEAN UNION
• The European Union initially included only the principal
Western European nations such as Italy, Germany,
France, and the United Kingdom. But by 2021, 27
countries belonged to the EU.
• That number was reduced from 28 when the United
Kingdom, one of the founding members, decided to
leave the EU.
• The EU has eliminated most quotas and set uniform
tariff levels on products imported and exported within
its group. It is the largest free marketplace in the world
and produces nearly one-quarter of total global wealth.

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