An Analysis of Mercosur's Regional Trading Arrangements

Abstract

After six years of stop‐start negotiations, Mercosur is no closer to signing a regional trading agreement (RTA) with the EU, whilst negotiations to finalise a Free Trade of the Americas Agreement (FTAA) have also stalled. This is due to various factors: economic crises in Mercosur, intransigence by member countries and uncertainty surrounding the outcome of the Doha Round. Estimates from the trade literature predict welfare gains to Mercosur from both RTAs whilst only one study assesses the additional benefits of removing non‐tariff barrier (NTB) trade costs which have remained largely unchallenged within the multilateral forum. In this paper, we improve the treatment of NTB estimates employing a theoretically consistent gravity specification, where calculated tariff‐equivalent estimates are subsequently implemented into a modified computable general equilibrium (CGE) model. Relative to a realistic baseline, and incorporating trade‐induced productivity and capital accumulation effects, we reassess the benefits of both regional initiatives to Mercosur, revisiting the claim that NTB trade cost abolition doubles the ‘standard’ welfare estimates. Contrary to previous studies, the results suggest that an FTAA yields greater gains to Mercosur than an EU RTA whilst the claim of Monteagudo and Watanuki (2003 ) pertaining to trade cost elimination is understated.

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