The regional free-trade agreements popping up around the globe are likely to spur international banks to stick closer to their own backyards.

In the Western Hemisphere, the United States, Mexico, and Canada hope to finalize a trade agreement by July, while Latin American countries already have four trading zones of their own.

Government and industry officials suggest the agreements could serve as a stepping-stone toward a single free-trade zone for the entire hemisphere, thus smoothing capital flows between North and South America.

In Europe, the 12 member countries of the European Community are slated to eliminate trade barriers against each other by the end of this year.

Although the process suffered a blow this month when Danish voters rejected the economic treaty agreed to by European Community leaders, nonmember such as Switzerland, Austria, and Finland are lining up to join.

Many Trade Zones

Japan, China, and developing countries in Southeast Asia are tightening trade and financial links.

According to a recent study by the Federal Reserve Bank of Boston, at least 23 trading zones straddle the globe.

The biggest is the European Community which accounted for 41% of world trade in 1990.

The smallest is the Organization of East Caribbean States, a customs union accounting for 0.02% of world trade.

Its members are Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts-Nevis St. Lucia, St. Vincent and the Grenadines, and the British Virgin Islands.

No One Is Immune

Banks have not remained immune to the trend toward regionalization

"Services often tend to follow merchandise trade, and banking follows other business or goes along with it," says Norman S. Fieleke, vice president and economist at the Boston Fed and an author of the study.

Although the regionalization of banking is harder to quantify, some U.S. banks are rapidly expanding business closer to home while shunning activities on the other side of the globe.

"If you look at distribution of capital flows, the bulk of the money going into Latin America is being intermediated by U.S. banks, into the former Soviet Union by European banks, and into Asia by Japanese banks," says Alan Stoga, managing director at Kissinger Associates Inc. in New York.

Big U.S. banks are making Latin America a major target of their overseas activities.

"The historic economic relation between the U.S. and Latin America is reemerging," managing director Lincoln Rathnam of Scudder, Stevens & Clark, a mutual-funds manager, told bankers at the annual convention of the Bankers Association for Foreign Trade last month.

Regionalization Found

U.S. bank's rapid expansion in Latin America, he and others add,m offers concrete evidence of the broader trend toward a regionalization of the world's economy.

German, French, Austrian and Italian banks are concentrating on expanding locally while Japanese banks are putting business in Asia at the top of their priorities.

As much as two-thirds of private loans to China, for example, are now from Japanese banks, estimates Yoh Kurosawa, president of the Industrial Bank of Japan.

Many see the slow pace of complex international trade talks under the auspices of the General Agreement on Tariffs and Trade as the main reason behind the rise of regional trade blocs.

Simplifying the Process

The faltering of international trade talks, Mr. Fieleke notes, "inclines countries to strike a preferential bargain with just a few other countries rather than endure the lengthy and dubious multilateral GATT negotiations."

"Not surprisingly," Mr. Fieleke says, "agreements on matters of this nature are more readily reached among relatively few countries whose relevant policies are already fairly similar."

"The present stalemate in the Uruguay round [of international talks on free trade in services] has sharply raised the prospect of the regional path," noted C. Fred Bergsten, director of the Washington-based Institute for International Economics, in a symposium last year.

"If the [Uruguay] round were to fail," he said, "the trend toward regionalism almost certainly would accelerate."

Step in Right Direction?

Some bankers believe the drift toward regional trading blocs makes a lot of sense and is a step toward the long-term goal of global free trade.

"One practical way to extend credit to developing countries may be determined by the comparative advantage banks have in making a credit-risk judgment about countries in their region - or by the close economic relationships banks have with them," Mr. Kurosawa said at the International Monetary Conference in Toronto earlier this month.

If this approach is used, "Latin American countries will receive credit primarily from U.S. banks, East European countries will get help from European and U.S. banks, while Japanese banks will extend credit with the emphasis on Asian countries," he said.

A Host of Perils

Other bankers are worried that regional trading blocs could promote price fixing, stifle competition, and add more barriers to global free trade.

"History has made it brutally clear that humankind cannot afford the creation of 'Fortress America,'|Fortress Europe,' or |Fortress Pacific,' Allan R. Taylor, chairman and chief executive officer of the Royal Bank of Canada, warned earlier this month.

"If there is not an effective GATT system, [regional free trade agreements] would almost certainly come to be viewed as alternatives to globalism," Mr. Bergsten noted.

"In that case, they would almost certainly evolve over time in an exclusionary and eventually discriminatory direction.

"The economic costs would be significant and growing," and "the political effects would, at a minimum, be worrisome," he added.

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