Over the past several decades, more and more countries have entered into preferential trading arrangements, provoking concern that the benefits of free trade are being sacrificed to growing discrimination. Just how widespread is this discrimination in international trade, and is it "legitimate" under the codes of international behavior to which countries generally subscribe? What does economic theory tell us about the likely consequences of such discrimination, and why do so many nations engage in it?
The author finds that most of the preferential trading arrangements, accounting for about two-thirds of world trade, have increasingly resembled "trading blocs," in that their trade has become oriented more inward, among the members, and less outward, with the rest of the world. Over the long run, he points out, nondiscriminatory reductions in trade barriers are clearly preferable to discriminatory reductions. But should global negotiations fail, blocs that truly liberalized trade among themselves could improve the general welfare. To set the best example for the rest of the trading world, they should be receptive to new members, for the ideal free trade area is worldwide in scope.