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

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  • Céline Carrere

    (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)

Abstract

This paper focuses on two issues that challenge the accepted pessimistic view that regional trade agreements (RTAs) between developing countries in welfare terms by taking into account scale economies in transport. First, how is the standard welfare analysis of an RTA 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 RTAs? A standard model of inter and intra-industry trade is augmented by a “hub-and-spoke” transport network structure, where the standard “iceberg” transport cost model is contrasted with one in which transport costs depend on the distance between trade partners, the volume of trade, and the level of development. Under a plausible parameterization for scale economies in transport, regional liberalization will have persistent effect on trade flows through an irreversible effect on regional transport costs that improves welfare. Free trade achieved under an RTA leads to permanently higher welfare than under multilateral liberalization.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00556992.

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Date of creation: 18 Jan 2011
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Handle: RePEc:hal:wpaper:halshs-00556992

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Keywords: regional integration; Welfare; Transport Costs; Economies of Scale; developing countries;

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  1. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Boston College Working Papers in Economics 593, Boston College Department of Economics.
  2. David Hummels & Georg Schaur, 2012. "Time as a Trade Barrier," NBER Working Papers 17758, National Bureau of Economic Research, Inc.
  3. 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.
  4. Jeffrey A. Frankel & Ernesto Stein & Shang-Jin Wei, 1996. "Regional Trading Arrangement: Natural or Super-Natural?," NBER Working Papers 5431, National Bureau of Economic Research, Inc.
  5. Djankov, Simeon & Freund, Caroline & Pham, Cong S., 2006. "Trading on time," Policy Research Working Paper Series 3909, The World Bank.
  6. 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.
  7. 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).
  8. Paul Krugman, 1991. "The move toward free trade zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-58.
  9. Paul Collier & Jan Willem Gunning, 1997. "Explaining African economic performance," CSAE Working Paper Series 1997-02.2, Centre for the Study of African Economies, University of Oxford.
  10. 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.
  11. Limao, Nuno & Venables, Anthony J., 1999. "Infrastructure, geographical disadvantage, and transport costs," Policy Research Working Paper Series 2257, The World Bank.
  12. Fink, Carsten & Mattoo, Aaditya & Neagu, Ileana Cristina, 2001. "Trade in international maritime services : how much does policy matter?," Policy Research Working Paper Series 2522, The World Bank.
  13. 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.
  14. Dollar, David & Micco, Alejandro & Clark, Ximena, 2002. "Maritime transport costs and port efficiency," Policy Research Working Paper Series 2781, The World Bank.
  15. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
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