Regional integration agreements - a force for convergence or divergence?

The author examines how benefits - and costs - of a free trade area are divided among member countries. Outcomes depend on the member countries'comparative advantage, relative to one another and to the rest of the world. The author finds that free trade agreements between low-income countries tend to lead to divergence in member country incomes, while agreements between high-income countries tend to lead to convergence. Changes introduced by comparative advantage may be amplified by the effects of agglomeration. The results suggest that developing countries may be better served by"north-south"free trade agreements, because"north-south"agreements increase their prospects for convergence with high-income members of the free trade area. In"north-south"free trade agreements, additional forces are likely to operate. The agreements may be used, for example, as a commitment mechanism to lock in economic reforms (as happened in Mexico with the North American Free Trade Agreement and in Eastern European countries with the European Union). A free trade agreement may also - through its effect on trade and through foreign direct investment - promote technology transfer to lower-income members.