Defects in the Concept of Regionalism to Solve Trading Problems

This chapter, originally connected with 1955 U.S. foreign economic policy debates and later collected in The Liberal Economic Order, examines whether regional trading arrangements can solve trade and payments problems. Haberler’s answer is cautious and largely negative: American policy should continue to favor multilateral trade, non-discrimination, and the most-favoured-nation principle. Regionalism is acceptable only when it creates something close to genuine economic integration, not when it becomes a device for selective protection.

American foreign economic policy has always favoured the principle of multilateral trade and non-discrimination.

Haberler defines multilateralism as the economic rule that countries should buy from the cheapest sources and sell in the best markets, while non-discrimination is its legal expression. The most-favoured-nation clause prevents trading partners from granting special advantages to some countries while excluding others. This distinction lets him separate bilateral negotiation, which may be practical and harmless, from discriminatory regional outcomes, which undermine the multilateral trading order.

The essay’s main analytical problem is the apparent inconsistency in U.S. policy. Washington has historically opposed imperial preferences and other discriminatory tariff systems, yet it has tolerated or even encouraged customs unions. Haberler does not deny that customs unions discriminate against outsiders; indeed, he treats that objection seriously. But he argues that the two arrangements differ in economic structure and likely effect.

Apart from such exceptions which were only suffered, there have always been others which were not only accepted as perfectly legitimate, but were even applauded or encouraged. The most important exception of this kind is the customs union.

A preferential tariff regime lowers duties selectively for favored insiders while preserving separate national tariff systems. It therefore invites bargaining, product-by-product discrimination, administrative complexity, and capture by protected interests. A customs union, by contrast, abolishes internal tariffs generally among its members and adopts a common external tariff. It may still divert trade away from cheaper outsiders, but it is also more likely to create trade by enlarging the area of free exchange.

If tariff preferences are bad because they imply discrimination, then a customs union should be worse because it implies a higher degree of discrimination.

Haberler’s answer is that the degree of discrimination is not the only relevant test. The decisive issue is whether an arrangement expands commerce and approximates freer trade, or merely reallocates trade toward politically favored suppliers. Customs unions can create a larger integrated market, simplify customs administration, and reduce barriers across all internal trade. Preferences remain partial, selective, and more easily manipulated.

A customs union does away with all customs red tape, simplifies customs procedures, and creates a large free trade area between the members of the union.

The chapter also stresses feasibility. Genuine customs unions are difficult because they require not only tariff elimination but agreement on a common external tariff and, in fuller forms, coordination of quotas, exchange controls, payments policy, and other economic regulations. Regionalism is therefore not an easy shortcut around the politics of liberalization. If it is serious, it faces the same domestic resistance as general tariff reduction plus the additional burden of intergovernmental harmonization.

Haberler’s policy implications are restrained. The United States need not oppose countries that truly wish to form large free-trade areas, especially where integration resembles the advantages of the American national market. But it should not promote discriminatory blocs as a general solution, particularly in Europe, the sterling area, or Asia. He worries that such blocs would injure outsiders and could damage trade-dependent economies more than they would help their members. Japan is treated as a key case: its economic problem cannot be solved by confining it to an Asian regional market, because its trade needs are worldwide.

The essay concludes by defending limited cooperation without endorsing trade blocs. Technical or sectoral cooperation among smaller groups of states may be useful in fields such as transport, fisheries, power, or research. What must not be sacrificed is the multilateral character of trade itself. Haberler’s enduring contribution is to distinguish the institutional form of agreements from their economic effect: the test is whether regionalism moves the world toward wider liberal exchange or merely gives discrimination a more respectable name.