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Continental Trading Blocs: Are They Natural, or Super-Natural?

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Author Info
Jeffrey A. Frankel
Ernesto Stein
Shang-Jin Wei

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4588.

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Date of creation: Dec 1993
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Publication status: published as Frankel, J., E. Stein and S. J. Wei. "Trading Blocs And The Americas: The Natural, The Unnatural, And The Super-Natural," Journal of Development Economics, 1995, v47(1), 61-95. The Regionalization of the World Economy, Frankel, Jeffrey, ed., Chicago: The University of Chicago Press, 1997.
Handle: RePEc:nbr:nberwo:4588

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F15 - International Economics - - Trade - - - Economic Integration

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