Multilateralism and Regionalism Essay Example | Topics and Well Written Essays - 5000 words

Multilateralism and Regionalism - Essay Example Most of these regional agreements remained within the concept of free trade areas and most of them were based on a multilateralization of bilateral agreements or unions. The mushrooming of initiatives gave birth too many treaties and institutions of economic integration which still exist, but never were a success, because regional areas were conceived as likelier sites for import-substituting industrialization than small national markets. Few of these regional groupings were successful in furthering freer trade or deeper economic integration between partners. In the developing world regional agreements were seen as a means of reducing dependence on economic ties with the capitalist core region. The theory of comparative advantage, certainly, argues that unobstructed exchange between countries will augment the total amount of world output if every country tends to focus in those goods that it can generate at a comparatively lower cost compared to possible trading partners. Every country then will trade several of those lower-cost goods with other nations for goods that can be formed elsewhere more economically than at home. In the end, with free trade amongst nations, all countries will discover that their consumption potential recline outside their domestic production potential. Comparative advantage and its expansions from a theoretical perspective have not resulted in any considerable weakening of the general strength of this body of theory nor of its consequence, a free trade system. The rationale for free trade is thus quite old. Building his case on the gains from trade to be had from specialization reflecting the division of labor, Smith had the essence of the argument right. But it was left to David Ricardo (building on James Mill) to clinch the case formally. Ricardo used a stripped-down model- only one factor of production with constant productivity of labor in two goods, but with relative productivity between the goods different across two countries-to show that both countries could gain from trade via specialization. The Ricardian analysis implied that this "technical possibility" of gaining from trade would be realized if a policy of free trade were adopted in an institutional setting where prices guided resource allocation. But the analytically satisfactory proofs of trade's benefits that we modern economists demand are the handiwork of theorists working in the twentieth century. David Ricardo armed advocate of free trade with the theorem of comparative advantage. His basic assumption was that every economic value was created by labor (the labor theory of value) and a belief that the three basic factors of production (land, labor, and capital) could not move across national boundaries. Ricardo and other economists, however, were interested in learning what law governs the distribution of national income among the factors production, and what the determinants of international trade patterns are. Heckscher - Ohlin approach The classical Ricardo assumed, literally or in effect, a single factor of production. Obviously, that assumption precluded considerations such as the consequences of varying input proportions and of changes in trade on the distribution