We summarise salient developments in the interaction of the multilateral trading system and multilateral trading agreements (MTAs) on the one hand and regional trading agreements (RTAs) on the other. We then consider the economic effects of RTAs, comparing customs unions with free trade agreements. We argue, contrary to much received wisdom, that either may produce more economic benefits than the other, depending on the specific context in which they are introduced. There follows a discussion of the political economy effects of RTAs. Some of these have unfavourable, some neutral and some favourable effects on the progress of further MTAs. We conclude that the case against RTAs as eroding the MTS and inhibiting further MTA negotiations, as expounded by such economists as Krueger and Bhagwati, is not well founded. There remain grounds for optimism that the process of competitive liberalisation in RTAs will lead eventually to further multilateral liberalisation.
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