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Will the real"natural trading partner"please stand up?

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  • Schiff, Maurice

Abstract

Adherents of the"natural trading partner"hypothesis argue that preferential trade agreements (PTAs) are more likely to improve welfare if participating countries already trade disproportionately with each other. Opponents of the hypothesis claim that the opposite is true: welfare gains are likely to be greater if participating countries trade less with each other. The author shows that neither analysis is correct. The"natural trading partner"hypothesis can be rescued if it is redefined in terms of complementarity or substitutability in the trade relations of countries, rather than in terms of their volume of trade. The author asks not whether a country should form or join a trading bloc but which partner or partners it should select if it does join such a bloc. He shows that the pre-PTA volume of trade is not a useful criterion for selecting a partner. The pre-PTA volume is equal to zero if the partner is an importer of the good sold to the home country and it is indeterminate if the partner is an exporter of that good. Among the author's conclusions: 1) The home country is better off with a larger partner country. First, a large partner is more likely to satisfy the home country's import demand at the world price. Second, the home country is likely to gain more on its exports to a large partner country, because that partner is likely to continue importing from the world market after formation of the trading bloc. And since the partner charges a tariff on imports from the world market, the home country is more likely to improve its terms of trade by selling to the partner at the higher tariff-inclusive price if the partner is large. 2) The PTA as a whole is likely to be better off if each country imports what the other exports (rather than each country importing what the other imports). Losses are similar but less likely, while gains are both more likely and the same or larger.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2161.

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Date of creation: 31 Aug 1999
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Handle: RePEc:wbk:wbrwps:2161

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Keywords: Rules of Origin; Environmental Economics&Policies; Trade Policy; Economic Theory&Research; Payment Systems&Infrastructure; Trade Policy; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Economic Theory&Research; Trade and Regional Integration; Environmental Economics&Policies;

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  1. Olarreaga, Marcelo & Soloaga, Isidro, 1998. "Endogenous Tariff Formation: The Case of Mercosur," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1848, C.E.P.R. Discussion Papers.
  2. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers, C.E.P.R. Discussion Papers 827, C.E.P.R. Discussion Papers.
  3. Schiff, Maurice, 1996. "Small is beautiful : preferential trade agreements and the impact of country size, market share, efficiency, and trade policy," Policy Research Working Paper Series 1668, The World Bank.
  4. Schiff, Maurice, 1997. "Small is Beautiful: Preferential Trade Agreements and the Impact of Country Size, Market Share, and Smuggling," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 12, pages 359-387.
  5. Martin Richardson, 1994. "Why A Free Trade Area? The Tariff Also Rises," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 6(1), pages 79-96, 03.
  6. Panagariya, A., 1997. "Preferential trading and the myth of natural trading partners," Japan and the World Economy, Elsevier, Elsevier, vol. 9(4), pages 471-489, December.
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Cited by:
  1. L. Alan Winters, 2000. "Regionalism and Multilateralism in the Twenty-First Century," IDB Publications 8749, Inter-American Development Bank.
  2. Shamim Shakur & Chris Nees, 2011. "An application of the natural trading partner hypothesis to New Zealand- ASEAN trade," Economics Bulletin, AccessEcon, vol. 31(4), pages 3077-3088.
  3. Rym Ayadi & Luc De Wulf & Moez El Elj & Michael Gasiorek & Ahmed Ghoneim & Javier Lopez Gonzalez & Selen Guerin & Peter Holmes & Hammad Kassal & Maryla Maliszewska & Mahmut Tekce, 2009. "Economic Integration in the Euro-Mediterranean Region," CASE Network Reports 0089, CASE-Center for Social and Economic Research.
  4. Kaminski, Bartlomiej & de la Rocha, Manuel, 2003. "Stabilization and association process in the Banlkans : integration options and their assessment," Policy Research Working Paper Series 3108, The World Bank.
  5. Khadan, Jeetendra & Hosein, Roger, 2013. "New Empirical Insights into the “Natural Trading Partner” Hypothesis for CARICOM Countries," MPRA Paper 50493, University Library of Munich, Germany.
  6. Islam, Sulequl, 2003. "Expansions of the European Union and the NAFTA: Implications for New and Non-Member countries," Applied Econometrics and International Development, Euro-American Association of Economic Development, Euro-American Association of Economic Development, vol. 3(2).
  7. Maur, Jean-Christophe, 2008. "Regionalism and trade facilitation : a primer," Policy Research Working Paper Series 4464, The World Bank.
  8. Khadan, Jeetendra & Hosein, Roger, 2014. "Trade, Economic and Welfare impacts of the CARICOM-Canada Free Trade Agreement," MPRA Paper 54836, University Library of Munich, Germany.
  9. Maurice Schiff & Yanling Wang, 2007. "North-South technology diffusion, regional integration, and the dynamics of the “natural trading partners” hypothesis," Revue d’économie du développement, De Boeck Université, vol. 21(5), pages 69-84.
  10. Ramirez, Andres & Kwok, Chuck C.Y., 2010. "Settling the debate on multinational capital structure using the CEPR measure," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 20(4-5), pages 251-271, December.
  11. World Bank, 2006. "Is There a New Vision for Maghreb Economic Integation? Volume 2. Annex," World Bank Other Operational Studies 19624, The World Bank.
  12. Schiff, Maurice & Wang, Yanling, 2009. "The Regional Dimension of North-South Trade-Related R&D Spillovers," Policy Research Working Paper Series 4826, The World Bank.
  13. Ng, Francis & Yeats, Alexander, 2003. "Major trade trends in East Asia : what are their implications for regional cooperation and growth," Policy Research Working Paper Series 3084, The World Bank.

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