Regional Trading Arrangements: Natural or Super-Natural

This paper summarizes recent research by the authors on the effects of tree trade areas (FTAs). Within our model, which emphasizes inter-continental transport costs, several conclusions arise. (1) FTAs are likely to be detrimental over a moderate range of parameter values, even if drawn along natural regional lines. (2) A small margin of preferences for neighbors is beneficial. (3) Optimal preferences depend on the parameters, particularly on transport costs. (4) If preferences are raised futther, they enter the zone of negative returns to regionalization, and eventually the super-natural zone, where welfare is lower than under the MFN status quo. Estimates from the gravity model suggest the world system may already be in the super-natural zone. The core model leaves out many factors. But we have pursued a variety of extensions by now. Perhaps the two most important are generalizing the highly stylized model of trade (to include factor endowments), and relaxing the assumption that the inter-bloc level of tariffs remains fixed. In the latter case, allowing tariffs to be endogenous yields a much more optimistic outlook for the effects of FTAs.


Issue Date:
1996-01
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/233421
Total Pages:
22
JEL Codes:
Fl
Series Statement:
Working Paper
C96-059




 Record created 2017-04-01, last modified 2017-08-29

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