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

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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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Bibliographic Info

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.
Handle: RePEc:nbr:nberwo:4588

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  1. 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.
  2. Baldwin, Richard, 1993. "A Domino Theory of Regionalism," CEPR Discussion Papers 857, C.E.P.R. Discussion Papers.
  3. Jeffrey A. Frankel & Shang-Jin Wei, 1993. "Emerging Currency Blocs," NBER Working Papers 4335, National Bureau of Economic Research, Inc.
  4. C. Fred Bergsten, 1991. "Commentary: the move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 27-35.
  5. 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.
  6. Wang, Zhen Kun & Winters, L. Alan, 1991. "The Trading Potential of Eastern Europe," CEPR Discussion Papers 610, C.E.P.R. Discussion Papers.
  7. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  8. 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.
  9. 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.
  10. 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.
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