Regional trade agreements and the new theory of trade

Abstract

Purpose The purpose of this paper is to explore the two issues of regional trade agreements (RTAs) and the new theory of international trade and draw conclusions for Pacific Island countries (PICs). The authors provide a deeper conceptual treatment of the consequences of RTAs and analyse the new theory of international trade to explore its implications for trade policy in PICs. Design/methodology/approach With regard to RTAs, the argument is developed in the context of the conjecture that questions the benefits from adopting more open trade policies with neighbours while maintaining restrictive policies towards the rest of the world. The authors draw on international and regional analytical literature and on recent modelling work to review critically the possible gains and losses of RTAs for PICs. In the latter issue, the focus is on the roles of imperfect competition and scale economies and their relevance to PICs. Findings Freeing up trade gradually and unilaterally and realizing the benefits of comparative advantage remains the best way to maximise welfare. PICs could be worse off under a complex system of overlapping RTAs and existence of RTAs by Australia and New Zealand outside the region has the possibility of marginalizing weak PICs economies. Practical implications PICs are currently at a critical juncture in terms of trade policy making with various trade agreements being thrown in the region and this paper has the capacity to provide some answers to policy makers on the approach to take. Originality/value The paper offers insights into regional trade agreements and the new theory of trade.

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