A highway across the Atlantic? Trade and welfare effects of the EU-Mercosur agreement

In this paper we analyze the EU-Mercosur agreement and predict its effects on trade and welfare using a general equilibrium structural gravity model. First, we exploit the detailed provision-level information available for the EU-Mercosur agreement to identify partial equilibrium trade effects of existing treaties with similar set of provisions. In a second step, the estimated increase in trade is mapped into reductions in bilateral trade costs and imputed to EU-Mercosur country pairs to compute the general equilibrium effects of the agreement in terms of trade creation, trade diversion, and welfare effects. Our results indicate that the positive effects on trade and welfare stemming from the EU-Mercosur agreement are likely to be economically important, especially for Mercosur countries, and substantially heterogeneous both between and within the two blocs.