Why Is Open Regionalism Not Always Good?

Abstract

When the Asia Pacific Economic Cooperation (APEC) formally adopted the principle of "open regionalism" (OR) in its trade liberalization in 1991, many were optimistic that this approach suggested the bloc as a stepping stone toward global free trade. This optimistic view was reinforced by the economic theorizing of Sang-Seung Yi (1996). This paper shows formally via a simple model why OR may fail. We unpick Yi (1996) systematically and explain that OR works in his model because of quasilinear preferences and Ricardian technology assumptions. Once these assumptions are replaced with constant elasticity of substitution (CES) preferences and increasing marginal costs, OR fails to ensure global free trade as an equilibrium when the world consists of a country that is sufficiently larger than the rest of the world.