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‘Natural’ Trading Blocs: A Closer Look

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  • Nitsch, Volker

    () (Bankgesellschaft Berlin)

Abstract

It is occasionally argued that the formation of trading blocs between geographi - cally proximate countries should be encouraged because positive welfare effects are more likely to outweigh negative welfare effects. This paper presents a simple d i ff e rentiated products model that allows to test whether the formation of a ‘natural’ trading bloc, first, is indeed increasing world welfare and, second, is welfare-superior to the formation of an ‘unnatural’ trading bloc. Simulations show that, while the removal of trade barriers always improves world welfare, ‘unnatural’ bloc formation may, under some conditions, be welfare-superior to the formation of trading blocs along ‘natural’ lines. The concept of ‘natural’ trad - ing blocs is therefore a misguided prescription.

Suggested Citation

  • Nitsch, Volker, 1997. "‘Natural’ Trading Blocs: A Closer Look," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 433-455.
  • Handle: RePEc:ris:integr:0058
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    Keywords

    Natural;

    JEL classification:

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

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