Globalization in the 21st Century: How Interconnected is the World?
Patrick A. McLaughlin, Research Fellow here at the Mercatus Center, contributed to this book with a chapter on analyzing the role of trade aggreements in spurring global trade and regional
This chapter examines conceptually and empirically the role of trade agreements in facilitating globalization and providing potential opportunities for countries to develop further and raise their standards of living, especially in the Middle East.
The discussion is structured around four themes; first, in order to focus the discussion, we offer a concise and tractable definition of "globalization." While much anecdotal evidence indicates that globalization is progressing, we step back and try to take a "bird's-eye view" of how inter-connected the world really is and argue that, while globalization has advanced, the world still has a considerable way to go before it becomes "flat" - to use Thomas Friedman's metaphor. In particular, we examine how "flat" the world is from the perspective of international trade flows.
Second, the growth in the number of parties to the WTO (150 at the time of publication) and the more modest declines in countries' non-tariff barriers to international trade (relative to tariffs due to more difficulty in lowering non-tariff barriers) have lowered the relative economic and political costs of forming trade agreements. We argue that this has created a market for trade agreements. Trade agreements are likely determined under competitive conditions (so-called "competitive liberalization") and recent empirical evidence now shows they can be well predicted based on countries' economic characteristics.
Third, having now experienced 50 years of FTA formation throughout the world and with the development of better statistical techniques, policy makers can examine with actual data the ex post gains from trade agreements and economic integration agreements. Evidence indicates that the gains from trade agreements are much larger than previously prevailing economists' ex ante analyses (using "computable general equilibrium models") previously have suggested. We discuss the impact of the Gulf Cooperation Council's free trade agreement on the member nations' trade and compare these estimates to those for free trade agreements in other parts of the world (estimated using similar techniques).
Finally, the paper concludes by arguing that the worldwide "market" for free trade agreements is now a fact and the market will likely continue to grow in step with globalization. Regions of the world that have not - and will not - form economically-rationalized free trade agreements and participate in this market will likely lose in relative economic terms, continuing to suffer from falls in relative per capita income and experiencing increased economic and political instability. We address the plausibility of broadening economic integration within the wider Middle East, a potential free trade agreement between the Gulf Coast Council and the European Union, and potential free trade agreements between the Gulf Coast Council countries and the United States.
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