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Continental Trading Blocs: Are They Natural or Supernatural?

In: The Regionalization of the World Economy

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  • Jeffrey A. Frankel
  • Ernesto Stein
  • Shang-Jin 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.

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This chapter was published in:

  • Jeffrey A. Frankel, 1998. "The Regionalization of the World Economy," NBER Books, National Bureau of Economic Research, Inc, number fran98-1, July.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7821.

    Handle: RePEc:nbr:nberch:7821

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    1. Peter A. Petri, 1993. "The East Asian Trading Bloc: An Analytical History," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 21-52 National Bureau of Economic Research, Inc.
    2. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    3. Jeffrey A. Frankel, 1992. "Is Japan creating a yen bloc in East Asia and the Pacific?," Pacific Basin Working Paper Series 92-09, Federal Reserve Bank of San Francisco.
    4. Wang, Z.K. & Winters, L.A., 1992. "The Trading Potential of Eastern Europe," Discussion Papers 92-21, Department of Economics, University of Birmingham.
    5. Bhagwati, Jagdish N, 1971. "Trade-Diverting Customs Unions and Welfare Improvement: a Clarification," Economic Journal, Royal Economic Society, vol. 81(323), pages 580-87, September.
    6. Baldwin, Richard, 1993. "A Domino Theory of Regionalism," CEPR Discussion Papers 857, C.E.P.R. Discussion Papers.
    7. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers C93-026, University of California at Berkeley.
    8. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-59, December.
    9. C. Fred Bergsten, 1991. "Commentary: the move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 27-35.
    10. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
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