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Regional Trading Arrangement: Natural or Super-Natural?

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

Abstract

This paper summarizes recent research by the authors on the effects of free trade areas (FTAs). Within our model, which emphasizes inter-continental transport costs, several conclusions arise. (1) FTAs are likely to be detrimental over a moderate range of parameter values, even if drawn along natural regional lines. (2) A small margin of preferences for neighbors is beneficial. (3) Optimal preferences depend on the parameters, particularly on transport costs. (4) If preferences are raised further, they enter the zone of negative returns to regionalization, and eventually the super-natural zone, where welfare is lower than under the MFN status quo. Estimates from the gravity model suggest the world system may already be in the super-natural zone. The core model leaves out many factors. But we have pursued a variety of extensions by now. Perhaps the two most important are generalizing the highly stylized model of trade (to include factor endowments), and relaxing the assumption that the inter-bloc level of tariffs remains fixed. In the latter case, allowing tariffs to be endogenous yields a much more optimistic outlook for the effects of FTAs.

Suggested Citation

  • 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.
    • Handle: RePEc:nbr:nberwo:5431
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    References listed on IDEAS

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    1. repec:idb:wpaper:323 is not listed on IDEAS
    2. Antonio Spilimbergo & Ernesto Stein, 1998. "The Welfare Implications of Trading Blocs among Countries with Different Endowments," NBER Chapters, in: The Regionalization of the World Economy, pages 121-152, National Bureau of Economic Research, Inc.
    3. Shang-Jin Wei & Jeffrey A. Frankel, 1998. "Open Regionalism in a World of Continental Trade Blocs," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 440-453, September.
    4. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
    5. Jeffrey A. Frankel, 1998. "The Regionalization of the World Economy," NBER Books, National Bureau of Economic Research, Inc, number fran98-1, March.
    6. Antonio Spilimbergo & Ernesto Stein, 1998. "The Welfare Implications of Trading Blocs among Countries with Different Endowments," NBER Chapters,in: The Regionalization of the World Economy, pages 121-152 National Bureau of Economic Research, Inc.
    7. Alan V. Deardorff & Robert M. Stern, 2009. "Multilateral Trade Negotiations and Preferential Trading Arrangements," World Scientific Book Chapters, in: Globalization And International Trade Policies, chapter 6, pages 153-210, World Scientific Publishing Co. Pte. Ltd..
    8. Wonnacott, Paul & Wonnacott, Ronald, 1981. "Is Unilateral Tariff Reduction Preferable to a Customs Union? The Curious Case of the Missing Foreign Tariffs," American Economic Review, American Economic Association, vol. 71(4), pages 704-714, September.
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    JEL classification:

    • F1 - International Economics - - Trade

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