Regional Integration and Incomplete Club Goods: A Trade Perspective

I. INTRODUCTION In the last ten years, regional organizations have emerged as the fora of choice for tackling many of the world's most intransigent political and economic challenges. By providing smaller and more accessible venues for negotiations, regional organizations often make possible a more efficient means of consensus building than that usually available under multilateral frameworks like the World Trade Organization. And because many governments are more familiar with their neighbors than with far-flung multilateral interlocutors, regional organizations-frequently referred to in the literature as regional integration agreements ("RIAs")1-are also well-suited to achieving results in non-economic issue areas such as the environment, peace-building, and immigration. Yet despite their popularity, regional organizations are decidedly controversial, particularly among economists, for the very fact that they depart from multilateral (global) free trade and thereby the field's normative preference for efficiency.2 As integrative agreements only between neighboring countries, RIAs do not always create new trading opportunities. Instead, by lowering tariffs on goods flowing between member states, while at the same time retaining high tariffs against goods from third-party countries, they substitute intra-bloc imports for what would otherwise be imports from outside the group.3 Because of such trade diversion, many academics and policymakers have relied on longstanding economic theory to characterize regional free trade as a "club good"-that is, as a special private benefit deriving value, in part, from the fact that nonparticipants are excluded.4 This characterization not only highlights the fact that regional trade agreements are distinguishable from other kinds of accords in which cooperation creates benefits for both signatories and nonsignatories. It also implies two core descriptive claims regarding the underlying dynamics of regional integration. First, it suggests that regional organizations have strong internal dynamics that create overwhelming incentives for countries to form or to join them and for outsiders, in response, to create their own organizations in order to enjoy similar benefits. second, it implies that the size of any regional organization will be, in part, a function of the number of other countries that consume the club good. Where too many countries create a preferential market, a certain "congestion point" will be reached; beyond that juncture, adding additional members will diminish the value of membership in the organization for all participants. This Article undertakes the first systematic examination of RIAs as clubs in the legal literature and argues that although regional organizations exhibit some club-like dynamics they are at best incomplete forms of such cooperation. Two shortcomings are specifically identified. First, the Article shows that the legal architecture of trade agreements limits the degree to which regional organizations are truly exclusive. As a result, regional organizations provide fewer benefits to members than classic economic clubs. second, regional organizations are heterogeneous in ways other than those envisioned in the classic economic club literature. Specifically, members differ not in terms of the degree to which they prefer the club good-as is the theoretical conception of heterogeneity in the club goods literature-but instead in terms of their qualitative characteristics and competitiveness. Each member will thus not only incur different costs in joining a regional organization, but will also have a different point at which the preferential trading market will be congested with too many competitors. This heterogeneity further suggests that, all other political factors being equal,5 expansion of an RIA's membership will be based not so much on the economic competitiveness of new members, but instead on the inefficiency of a prospective member state's domestic industries relative to those of each of the RIA's members. …