Working Paper: NBER ID: w4588
Authors: Jeffrey Frankel; Ernesto Stein; Shangjin Wei
Abstract: Using the gravity model, we find evidence of three continental trading blocs: the Americas, Europe and Pacific Asia. Intra-regional trade exceeds what can be explained by the proximity of a pair of countries, their sizes and GNP/capitas, and whether they share a common border or language. We then turn from the econometrics to the economic welfare implications. Krugman has supplied an argument against a three-bloc world, assuming no transport costs, and another argument in favor, assuming prohibitively high transportation costs between continents. We complete the model for the realistic case where intercontinental transport costs are neither prohibitive nor zero. If transport costs are low, continental Free Trade Areas can reduce welfare. We call such blocs super-natural. Partial liberalization is better than full liberalization within regional Preferential Trading Arrangements, despite the GATT's Article 24. The super-natural zone occurs when the regionalization of trade policy exceeds what is justified by natural factors. Estimates suggest that trading blocs like the current EC are super-natural.
Keywords: Regional Trade Agreements; Gravity Model; Trade Policy; Economic Welfare
JEL Codes: F15; F13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regional trade policies (F13) | increased trade flows (F19) |
| low transport costs (L91) | welfare reductions (I38) |
| degree of liberalization (F13) | economic welfare outcomes (D69) |
| preferences reach around 10 percent (D11) | negative impact on welfare (I30) |