1 Schott, Jeffrey J., The Uruguay Round: An Assessment (Washington: Institute for International Economics, 1994), 61.Google Scholar

2 Jackson, John H., The World Trading System: Law and Policy of International Economic Relations (Cambridge: MIT Press, 1989), 53.Google Scholar

3 Yarbrough, Beth V. and Yarbrough, Robert M., Cooperation and Governance in International Trade: The Strategic Organizational Approach (Princeton: Princeton University Press, 1992).CrossRefGoogle Scholar Minilateralism is a term used by Yarbrough and Yarbrough, and is equivalent to our “bloc approach,” or what others have labeled regionalism or plurilateralism (for example, Dornbusch, Rudiger W., “Policy Options for Freer Trade: The Case for Bilateralism,” in Lawrence, Robert Z. and Schultze, Charles L., eds., An American Trade Strategy: Options for the 1990s [Washington: The Brookings Institution, 1990], 107).Google Scholar

4 Association agreements with Poland and Hungary took effect in February 1994 and a year later with the Czech Republic, Slovakia, Romania and Bulgaria. Most recently, the EU signed Agreements of Association with Estonia, Latvia, Lithuania and Slovenia. All of these states, along with Turkey, Cyprus and Malta have officially applied for full EU membership.

5 A 1990 agreement between Brazil, Uruguay, Argentina and Paraguay created Mercosur, which has the potential to be the largest free trade area in South America. Other major groupings include the Andean Pact (Colombia, Peru, Bolivia, Ecuador and Venezuela), the Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and the Caribbean Community (CARICOM).

6 Yarbrough and Yarbrough, Cooperation and Governance; Krugman, Paul, “Regionalism versus Multilateralism: Analytical Notes,” in Melo, Jaime De and Panagariya, Arvind, eds., New Dimensions in Regional Integration (Cambridge: Cambridge University Press, 1993), 158–79Google Scholar; and Jagdish Bhagwati, “Regionalism and Multilateralism: An Overview,” in ibid., 22–51.

7 Ibid., 29.

8 Krugman, “Regionalism versus Multilateralism,” 74.

9 A traditional strategy for reducing the difficulty of negotiating bilateral reductions within a multilateral forum is captured in the principal supplier rule. According to this rule, “requests for concessions on a particular product are normally made by, and only by, the prinicipal import suppliers, i.e. the largest suppliers of a product” ( Hoekman, Bernard M. and Kostecki, Michel M., The Political Economy of the World Trading System: From GATT to WTO [Oxford: Oxford University Press, 1995], 70Google Scholar). This approach was used extensively in GATT negotiations until the Kennedy round. While it makes preliminary negotiations easier by limiting them to the larger countries, the smaller suppliers must be included as the round approaches the “end-game” and attempts to work out the final balancing of concessions. As the number of GATT members grew, the benefit of these very resource-intensive, item-by-item negotiations was reduced, and the Kennedy and Tokyo rounds shifted to an across-the-board formula-based approach to tariff reductions. The item-by-item, principal supplier approach was again prominently featured during the Uruguay Round negotiations. Hoekman and Kostecki discuss a number of advantages and disadvantages to each of these negotiating approaches, but find no definitive advantage to one approach over the other.

10 Eurecom (Monthly Bulletin of the European Union Economic and Financial News), May 1994, 2.

11 Examples of both the consensus with respect to the bloc's staying power and the divisions with respect to their effect can be found in an edited volume by De Melo and Panagariya (New Dimensions in Regional Integration) containing contributions by many leading international economists. Bhagwati (“Regionalism and Multilaterism”) represents the pro-GATT side of the argument, while Dornbusch argues against the multilateral orthodoxy ( Dornbusch, , “Policy Options for Free Trade”; and “Dornbusch on Trade,” Economist, May 4, 1991Google Scholar). The view that the expansion of regional blocs will have a positive effect on moving the system toward greater liberalization can also be found in Hine, Robert C., “Regionalism and the Integration of the World Economy,” Journal of Common Market Studies 30 (1992), 115–23CrossRefGoogle Scholar; Preeg, Ernest H., “The Compatibility of Regional Economic Blocs and the GATT,” The Annals of the American Academy 526 (1993), 164–71CrossRefGoogle Scholar; Young, Soogil, “Globalism and Regionalism: Complements or Competitors,” in Bergsten, C. Fred and Noland, Marcus, eds., Pacific Dynamism and the International Economic System (Washington: Institute for International Economics, 1993), 111–31.Google Scholar On the other hand, Schott still sees multilateralism as the system's first-best option, and is even sceptical about the growth of regionalism ( Schott, Jeffrey J., “Trading Blocs and the World Trading System,” The World Economy 14 [1991], 1–17CrossRefGoogle Scholar). One of the few political scientists to address this issue, Oye acknowledges the growth of bilateralism and regionalism in the 1980s and argues that during that decade these discriminatory approaches did have a liberalizing effect on trade ( Oye, Kenneth A., Economic Discrimination and Political Exchange: World Political Economy in the 1930s and 1980s [Princeton: Princeton University Press, 1992]Google Scholar).

12 A highly stylized model developed by Krugman finds that bloc creation will have a negative impact on overall welfare ( Krugman, Paul, “Is Bilateralism Bad?” NBER Working Paper Series 2972 [1989]Google Scholar). According to his model, there is a U-shaped relationship between the number of blocs and welfare with one bloc (representing global free trade), and many blocs having the smallest negative impact on welfare. Intriguingly, three blocs produces the greatest negative impact on welfare; however, even in this case, the magnitude of that impact is relatively small. In a later study Krugman relaxes one of his original assumptions, allowing blocs to form “naturally,” based on regional groupings and finds that now the creation of blocs is unlikely to reduce world welfare ( Krugman, Paul, “The Move to Free Trade Zones,” Economic Review 76 [Federal Reserve Bank of Kansas City] [1991], 5–25Google Scholar). So, we find the same author with the same model comes to two very different conclusions with respect to the static welfare effects of bloc building. This has led others to refer to the “Krugman v. Krugman” controversy, and illustrates the lack of consensus for a model—static or otherwise—that investigates the consequences of bloc formation. See Frankel, Jeffrey, Stein, Ernesto and Wei, Shang-Jin, “Continental Trading Blocs: Are They Natural or Super-Natural,” NBER Working Paper Series 4588 (1993), 14.Google Scholar Srinivasan goes further criticizing Krugman's original model as being very close to “theory without relevance,” due to its unrealistic assumptions (T. N. Srinivasan, “Discussion—Regionalism versus Multilateralism [by Paul Krugman],” in De Melo and Panagariya, eds., New Dimensions, 84–89). He shows that when more realistic assumptions are introduced, there is no necessary relationship between the number of blocs and global welfare. On the other hand, Frankel, Stein and Wei (“Continental Trading Blocs”) take Krugman's model, introduce more realistic assumptions about transportation costs and use empirically based “best guesses” for some of the other parameters to show that even natural, continental-based, blocs can reduce welfare. Bhagwati and Panagariya summarize a number of recent studies that examine the impact of regionalism. They find that most of these studies lean toward the “malign-impact” conclusion. See Bhagwati, Jagdish and Panagariya, Arvind, “The Theory of Preferential Trade Agreements: Historical Evolution and Current Trends,” American Economic Review 86 (1996), 82–87.Google Scholar

13 Bhagwati, “Regionalism and Multilateralism,” 32–40.

14 A similar distinction is drawn by Hoekman, Bernard M., “Multilateral Trade Negotiations and Coordination of Commerical Policies,” in Stern, Robert M., ed., The Multilateral Trading System: Analysis and Options for Change (Ann Arbor: University of Michigan Press, 1993), 23.Google Scholar

15 Zamora, Stephen, “Voting in International Economic Organizations,” American Journal of International Law 74 (1980), 579.CrossRefGoogle Scholar

16 These were Articles I (most-favoured-nation treatment), II (schedules of concessions) and XXIX (rules for amending the agreement). The tariff reductions that resulted from the negotiating rounds became part of Article II, but they were not considered to be an amendment to the language of the article, and so unanimity was not required for their acceptance (Jackson, The World Trading System, 53).

17 Long, Olivier, Law and Its Limitations in the GATT Multilateral Trade System (Boston: M. Nijhoff, 1987).Google Scholar

18 Ibid., 54.

19 Jackson, The World Trading System, 53. “Side codes” were free-standing agreements among the signatory states. Even though 97 countries were GATT members by October 1989, no more than 37 signed any of the nine separate “codes” negotiated at the Tokyo round ( Jackson, John H., Restructuring the GATT System [London: The Royal Institute of International Affairs, 1990]Google Scholar).

20 Article IX states that “the WTO shall continue the practice of decision making by consensus followed under GATT 1947…. The body concerned shall be deemed to have decided by consensus on a matter submitted for its consideration, if no Member, present at the meeting when the decision is taken, formally objects to the proposed decision.”

21 In such a situation, the membership of the WTO must ask the state which has rejected the new amendment to withdraw from the WTO or allow it to remain but not be bound by the new rule.

22 Jackson, Restructuring the GATT, 67.

23 Hoekman and Kostecki, The Political Economy of the World Trading System, 46.

24 Each new step in the European integration process (for example, the completion of the internal market or monetary union) has required a unanimous decision. Recent developments that allow a country to “opt-out” of a specific decision (for example, the United Kingdom and Denmark with respect to monetary union) do not change the unanimity rule, but will allow different groups of member states to move ahead at different speeds on different issues. The Intergovernmental Conference (IGC), begun in March 1996, may introduce important changes in the agreement-making procedures of the EU. A likely outcome of the IGC is that decision making on more issues will move away from unanimity and toward some form of weighted majority voting. As we will show, such a move could ease barriers to agreement making.

25 NAFTA Agreement, quoted in Hufbauer, Gary C. and Schott, Jeffrey J., NAFTA: An Assessment (Washington: Institute for International Economics, 1993), 114.Google Scholar

26 Ibid., 104.

27 Hufbauer, Gary C. and Schott, Jeffrey J., Western Hemisphere Economic Integration (Washington: Institute for International Economics, 1994), 99.Google Scholar

28 We also acknowledge the fact that rational actors are capable of looking ahead and doing what game-theorists call backward induction, which means strategy choices of the countries in the first game (agreement making) can be affected by what is likely to happen in the second game (agreement maintenance).

29 McKelvey, Richard D., “Intransitivities in Multidimensional Voting Models and Some Implications for Agenda Control,” Journal of Economic Theory 12 (1976), 472–82CrossRefGoogle Scholar; Plott, Charles R., “A Notion of Equilibrium and Its Possibility under Majority Rule,” American Economic Review 57 (1967), 787–806Google Scholar; and Schofield, Norman, Social Choice and Democracy (Heidelberg: Springer Verlag, 1985).CrossRefGoogle Scholar

30 The term “stability” simply refers to a situation where an alternative chosen by the voting body will not be easily abandoned by the same voting body in favour of some other alternative. As such, it applies strictly to the decision-making process (our agreement-making game). The notion of “stability” has nothing to do with whether the decision reached (an alternative chosen) will be successfully enforced (our agreement-maintenance game, discussed below). One can imagine a situation where the decision of the voting body does not change (thus, the outcome is stable), but certain members of that body do not abide by the decision.

31 Kim, HeeMin, “The Strongly Stable Core in Weighted Voting Games,” Public Choice 84 (1995), 77–90CrossRefGoogle Scholar; Kramer, Gerald H., “A Dynamic Model of Political Equilibrium,” Journal of Economic Theory 16 (1977), 310–34CrossRefGoogle Scholar; and Schofield, Norman, Grofman, Bernard and Feld, Scott L., “The Core and the Stability of Group Choice in Spatial Voting Games,” American Political Science Review 82 (1988), 195–211.CrossRefGoogle Scholar

32 Long, Law and Its Limitations, 54.

33 This statement must be qualified because trade theory has identified certain conditions under which a country can gain from the unilateral imposition of a tariff. Optimal tariff theory argues a special case in which countries that are large enough to effect the terms of trade in a specific commodity can benefit by erecting a tariff on that commodity.

34 Krugman, “Regionalism versus Multilateralism,” 65.

35 Ibid., 72.

36 Lake, David A., “Beneath the Commerce of Nations: A Theory of International Economic Structures,” International Studies Quarterly 28 (1984), 143–70.CrossRefGoogle Scholar

37 Kindleberger, Charles P., The World in Depression, 1929–1939 (Berkeley: University of California Press, 1973)Google Scholar; and Mancur Olson, “Discussion—Multilateral and Bilateral Trade Policies (by Douglas Irwin),” in De Melo and Panagariya, eds., New Dimensions, 122–27.

38 Conybeare, John A. C., “Public Goods, Prisoners' Dilemmas, and the International Political Economy,” International Studies Quarterly 28 (1984), 5–22.CrossRefGoogle Scholar

39 Gowa, Joanne and Mansfield, Edward D., “Power Politics and International Trade,” American Political Science Review 87 (1993), 408.CrossRefGoogle Scholar

40 Axelrod, Robert, “The Emergence of Cooperation among Egoists,” American Political Science Review 75 (1981), 306–16CrossRefGoogle Scholar; Taylor, Michael, Anarchy and Cooperation (New York: Wiley and Sons, 1976)Google Scholar; and Taylor, Michael, The Possibility of Cooperation (Cambridge: Cambridge University Press, 1987).Google Scholar

41 Abreu, Dilip, “External Equilibria of Oligopolistic Supergames,” Journal of Economic Theory 39 (1986), 191–225CrossRefGoogle Scholar; and Fudenberg, Drew and Maskin, Eric, “The Folk Theorem in Repeated Games with Discounting and with Incomplete Information,” Econometrica 54 (1986), 533–54.CrossRefGoogle Scholar

42 We use Figure 1 here for the purpose of illustration only. The actual shape of the utility functions may differ with respect to the specific circumstances in which countries are placed. The game is a dilemma game as long as the U_i(D) function is above the U_i(A) function regardless of the number of other countries adhering to the agreement. This makes defection country i's dominant strategy.

43 Krugman, “Regionalism versus Multilateralism.”

44 Lake, “Beneath the Commerce of Nations.”

45 Kindleberger, The World in Depression; and Olson, “Discussion.”

46 Hardin, Russell, “Collective Action as an Agreeable N-Prisoners' Dilemma,” Behavioral Science 16 (1971), 472–81CrossRefGoogle Scholar; Olson, Mancur, The Logic of Collective Action (Cambridge: Harvard University Press, 1965)Google Scholar; and Schelling, Thomas, “Hockey Helmets, Concealed Weapons, and Daylight Savings: A Study of Binary Choices with Externalities,” Journal of Conflict Resolution 17 (1973), 381–428.CrossRefGoogle Scholar

47 Axelrod, Robert, “An Evolutionary Approach to Norms,” American Political Science Review 80 (1986), 1095–1111CrossRefGoogle Scholar; Bendor, Jonathan and Mookherjee, Dilip, “Institutional Structure and the Logic of Ongoing Collective Action,” American Political Science Review 81 (1987), 129–54CrossRefGoogle Scholar; Dawes, Robyn, “Social Dilemmas,” Annual Review of Psychology 31 (1980), 169–93CrossRefGoogle Scholar; Hardin, Russell, Collective Action (Baltimore: Johns Hopkins University Press, 1982)Google Scholar; Olson, Mancur, The Rise and Decline of Nations (New Haven: Yale University Press, 1982)Google Scholar; and Taylor, Michael, Community, Anarchy, and Liberty (Cambridge: Cambridge University Press, 1982).CrossRefGoogle Scholar

48 We wish to thank one of the Journal's reviewers for bringing this point to our attention.

49 On December 15, 1995, the EU and Mercosur signed a cooperation agreement in which they pledge to liberalize trade between these two regional blocs. While the current agreement may do nothing more than commit each side to work toward some long-term and nebulous goals, it is unique in that it is the first-ever agreement between two customs unions, and may signal the beginning of the “between bloc” game of reducing barriers (Eurecom, January 1996, 2).

50 As Bhagwati and Panagariya (“The Theory of Preferential Trade Arrangements,” 84) point out, one of the key questions is whether that interaction will be competitive or complementary. Will the creation/expansion of blocs have a malign or benign impact on multilateral liberalization? One of the steps in the evolution of these two approaches—the creation of the WTO—may have significantly enhanced their complementarity for two reasons: first, the WTO's improved dispute settlement process seems to be drawing in a lot of disputes from powerful economic actors who in the past might have attempted to resolve their differences through either bilateral negotiations or unilateral retaliation. This would indicate that even the most powerful actors see it as a viable arena in which to settle their differences. If it proves a satisfactory mechanism, it will be used more and could become an important arena for resolving disputes among powerful actors (including blocs). Second, the WTO has created a permanent committee to examine the consequences of existing blocs. This could become an important body for promoting complementarity (rather than competition) between regionalism and multilateralism.

51 This approach is similar to the computer tournament in Axelrod, Robert, The Evolution of Cooperation (New York: Basic Books, 1984).Google Scholar