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Regional Agreements and Welfare in the South:When Scale Economies in Transport Matter

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  • C�line CARRERE

    ()
    (Centre d'Etudes et de Recherches sur le D�veloppement International)

Abstract

This paper evidences that the accepted pessimistic view, in terms of welfare, of regional trade agreements between developing countries can be challenged by scale economies in transport. This paper focuses on two main issues. First, how is the standard welfare analysis of regional trade agreement affected by the endogeneity of transport costs (i.e. by the joint determination of trade quantities and transport costs)? Second, what are the long-run consequences of endogenous transport costs for welfare if worldwide free trade is achieved through preferential trade agreements? This paper extends the Spilimbergo and Stein (1998)'s model of interindustry trade (generated by relative factors endowment differences) intraindustry trade (generated by scale and product-diversity effects) and iceberg transport costs. In addition of assuming a "hub-and-spoke" transport network structure, we also consider that transport costs depend on the distance between trade partners (three types of costs are defined: regional, continental and across ocean) and on their development level. Most importantly, we allow for an explicit treatment of the transport sector. The main conclusion is that, with scale economies in transport, regional liberalization will have persistent effect on trade flows through irreversible effect on regional transport costs that improve the final welfare, for a developing country, under regional free trade agreement as well as under worldwide free trade.

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Bibliographic Info

Paper provided by CERDI in its series Working Papers with number 200513.

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Length: 48
Date of creation: 2005
Date of revision:
Handle: RePEc:cdi:wpaper:717

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Keywords: Economies of Scale.; Transport Costs; Welfare; regional integration;

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  1. Carsten Fink & Aaditya Mattoo & Ileana Cristina Neagu, 2002. "Trade in International Maritime Services: How Much Does Policy Matter?," World Bank Economic Review, World Bank Group, vol. 16(1), pages 81-108, June.
  2. David L. Hummels & Georg Schaur, 2013. "Time as a Trade Barrier," American Economic Review, American Economic Association, vol. 103(7), pages 2935-59, December.
  3. Caroline Freund, 2000. "Different Paths To Free Trade: The Gains From Regionalism," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1317-1341, November.
  4. Paul Krugman, 1991. "The move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
  5. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  6. Frankel, Jeffrey A & Stein, Ernesto & Wei, Shang-Jin, 1996. "Regional Trading Arrangements: Natural or Supernatural," American Economic Review, American Economic Association, vol. 86(2), pages 52-56, May.
  7. Simeon Djankov & Caroline Freund & Cong S. Pham, 2010. "Trading on Time," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 166-173, February.
  8. Frankel, Jeffrey A. & Stein, Ernesto & Wei, Shang-Jin, 1996. "Regional Trading Arrangements," Center for International and Development Economics Research, Working Paper Series qt5hf1z4rv, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  9. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
  10. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  11. Dollar, David & Micco, Alejandro & Clark, Ximena, 2002. "Maritime transport costs and port efficiency," Policy Research Working Paper Series 2781, The World Bank.
  12. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  13. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
  14. Busse, Matthias, 2003. "Tariffs, Transport Costs and the WTO Doha Round: The Case of Developing Countries," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 4(1).
  15. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, December.
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