Trade and Integration Policy Analysis for Mercosur: AMIDA Model with Imperfect Competition

Regional integration initiatives re-emerge in Mercosur, as the bloc faces multiple challenges in external fronts. At the regional level, the group signed an Free Trade Agreement (FTA) with the Andean Community, while widening its membership. At the multilateral front, the ongoing WTO Round will deliver a package of resolutions and set main targets for future liberalization in key trade areas. This will inevitably trigger a new push for regional approaches. For the Southern Cone, the bloc will seek the pending regional agreements with the EU25 and the whole Western Hemisphere. The United States, while maintaining its position in the Free Trade Area of the Americas (FTAA), has recently signed several bilateral agreements with Central and South American groups of countries. This will change the direction of current trade flows. Rising China and other Asian countries adds additional complexity in the global trade flows. All of these dynamic developments call for a re-evaluation of trade and integration options for Mercosur, together with devising new scenarios. In this paper, we apply a brand new static CGE model, called AMIDA (Analysing Mercosur’s Integration Decisions and Agreements) to help in shedding light on this diversity of options and opportunities. The model introduced several features both in modeling and database. First, it incorporates economies of scale and imperfect competition, applying a unique polynomial cost function. Second, for firm behavior, the model applies the Cournot-Nash oligopolistic competition. This allows analyzing strategic interaction among firms at home and with foreign competitors. Third, the model is built on the comprehensive hemispheric tariff database based on the FTAA database (IDB), incorporating a large number of ALADI (Latin American Integration Association) agreements. Fourth, scale economies are modeled on the basis of recent relevant studies. Finally, market concentration on the imperfect competition sectors is directly estimated from manufacturing data for key regions. We find that the north-south agreements with the United States and the EU25 have somewhat divergent consequences. As is already known, the greater integration of the Free Trade Area of the Americas (FTAA) is preferable to the bilateral FTA with the United States. The simulation results indicates that China is already an important and serious partner. The impact closely follows the pattern of the North-South agreement. We also measured the sectoral competitiveness for non-service sectors. It points to a key deficiency of the bloc, which possesses competitiveness in a few classical manufacturing industries and selected segments of the agribusiness with low value-added activities. All non-competitive sectors comprise key manufacturing industries. This suggests that though Mercosur’s trade policy is correct in pushing for greater market access, particularly in agriculture in international trade forums, and in having been quite aggressive in exploiting regional and comparative advantages, as well as in opening new markets and improving distribution channels, the bloc continues to experience a serious deficit in trade with higher-technology-content goods.