Welfare Implications of Regionalism in the GATT

This paper investigates the welfare implications of an existence of a free trade agreement (FTA) and a customs union (CU) within the GATT. Two types of GATT regimes are considered in a completely symmetric world: a pure GATT regime without any type of the regional trade agreements (RTAs), and a modified GATT regime with one of them. The main results are for a range of sufficiently high discount rate, first that free trade and global welfare efficiency can be supported under the pure GATT regime but not under the modified regimes, and second that a country's ranking of the both regimes depends on (1) whether it belongs to an RTA or not and (2) which one of the RTAs it belongs to. The insight of these results are that the regionalism in the GATT may restrict free trade and thus fails to achieve the highest global welfare.