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Trading Blocs: The Natural, the Unnatural, and the Super-Natural


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


Is the world breaking up into three trading blocs, one in the Americas, one in Europe and one in Pacific Asia? If so, is this deviation from the principle of MFN (nondiscriminatory trade policies) good or bad? This paper attempts to answer both questions. Using the gravity model to examine bilateral trade patterns throughout the world, we find evidence of trading blocs in the European Community, the Pacific, and the Western Hemisphere, as in earlier work. Intra-regional trade is greater than could be explained by natural determinants: the proximity of a pair of countries, their sizes and GNP/capitas, and whether they share a common border or a common language. Within the Western Hemisphere, MERCOSUR and the Andean Pact countries appear to function as significantly independent trading areas, but NAFTA much less so (as of 1990). The strongest grouping in most years is APEC (Asia Pacific Economic Cooperation,which includes the U.S. and Canada along with the Asian Pacific countries). The intra-regional trade bias within MERCOSUR increased the most rapidly during the 1980s. In East Asia, on the other hand, increased intra-regional trade can be explained entirely by the rapid growth of the economies. We then turn from the econometrics to an analysis of economic welfare. Krugman has supplied an argument against a world of three trading blocs (that they would be protectionist), in a model that assumes no transport costs. He has supplied another argument in favor of trading blocs, provided the blocs are drawn along the "natural" geographic lines of the continents, in a model that assumes prohibitively high transportation costs between continents. In this paper we attempt to resolve the Krugman vs. Krugman debate. We complete the model of the welfare implications of trading blocs for the realistic case where intercontinental transport costs are neither so high as to be prohibitive nor as low as the costs among neighbors. We consider three applications of the model. (1) Continental Free Trade Areas (FTAs). We show that it is not only Krugman's "unnatural" FTAs that can leave everyone worse off than under MFN, but that under conditions of relatively low intercontinental transport costs, FTAs that are formed along natural continental lines can do so as well. We call such welfare-reducing blocs supernatural.(2) Partial regionalization. We find that partial liberalization within a regional Preferential Trading Arrangement (PTA) is better than 100 percent liberalization, in contrast to the Article 24 provision of the GATT. The super-natural zone, where the regional trading arrangement reduces welfare, occurs for combinations of low inter-continental transport costs and high intra-bloc preferences, i.e., when the regionalization of trade policy exceeds what is justified by natural factors. (3) The formation of several sub-regional PTAs on each continent. We find that multiple Mks on each continent could lower welfare, but that multiple PTAs, with partial internal liberalization, would raise welfare. We conclude the paper with an attempt to extract estimates of transportation costs from the statistics. Estimates suggest that trading blocs on the order of the EC are in fact super-natural.

Suggested Citation

  • Frankel, Jeffrey A. & Stein, Ernesto & Wei, Shang-Jin, 1994. "Trading Blocs: The Natural, the Unnatural, and the Super-Natural," Center for International and Development Economics Research (CIDER) Working Papers 233217, University of California-Berkeley, Department of Economics.
  • Handle: RePEc:ags:ucbewp:233217

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    References listed on IDEAS

    1. Bhagwati, Jagdish N, 1971. "Trade-Diverting Customs Unions and Welfare Improvement: a Clarification," Economic Journal, Royal Economic Society, vol. 81(323), pages 580-587, September.
    2. Jeffrey A Frankel, 1993. "Is there a Currency Bloc in the Pacific?," RBA Annual Conference Volume,in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia.
    3. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters,in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc.
    4. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
    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. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
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    Cited by:

    1. Frankel, Jeffrey A. & Romer, David & Cyrus, Teresa, 1995. "Trade and Growth in East Asian Countries: Cause and Effect?," Center for International and Development Economics Research (CIDER) Working Papers 233408, University of California-Berkeley, Department of Economics.
    2. Jeffrey A Frankel, 1993. "Is there a Currency Bloc in the Pacific?," RBA Annual Conference Volume,in: Adrian Blundell-Wignall (ed.), The Exchange Rate, International Trade and the Balance of Payments Reserve Bank of Australia.
    3. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics,in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier.
    4. Juan José Echavarría, 1999. "Flujos comerciales en los países andinos: ¿liberalización o preferencias regionales?," COYUNTURA ECONÓMICA, FEDESARROLLO, September.
    5. 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.
    6. Muhammad Ullah & Kazuo Inaba, 2012. "Impact of RTA and PTA on Bangladesh’s Export: Application of a Gravity Model," Journal of Industry, Competition and Trade, Springer, vol. 12(4), pages 445-460, December.
    7. Barry Eichengreen & Douglas A. Irwin, 1998. "The Role of History in Bilateral Trade Flows," NBER Chapters,in: The Regionalization of the World Economy, pages 33-62 National Bureau of Economic Research, Inc.
    8. Jacques J. Polak, 1996. "Is APEC a Natural Regional Trading Bloc? A Critique of the ‘Gravity Model’of International Trade," The World Economy, Wiley Blackwell, vol. 19(5), pages 533-543, September.

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    International Relations/Trade;

    JEL classification:

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


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