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Regional Agreements and Welfare in the South: When Scale Economies in Transport Matter

  • Céline CARRERE

    ()

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

This paper focuses on two issues that challenge the accepted pessimistic view that regional trade agreements (RTAs) between developing countries in welfare terms by taking into account scale economies in transport. First, how is the standard welfare analysis of an RTA affected by the endogeneity of transport costs (i.e. by the joint determination of trade quantities and transport costs)? Second, what are the long-run consequences of endogenous transport costs for welfare if worldwide free trade is achieved through RTAs? A standard model of inter and intra-industry trade is augmented by a “hub-and-spoke” transport network structure, where the standard “iceberg” transport cost model is contrasted with one in which transport costs depend on the distance between trade partners, the volume of trade, and the level of development. Under a plausible parameterization for scale economies in transport, regional liberalization will have persistent effect on trade flows through an irreversible effect on regional transport costs that improves welfare. Free trade achieved under an RTA leads to permanently higher welfare than under multilateral liberalization.

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Paper provided by CERDI in its series Working Papers with number 200726.

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Length: 37
Date of creation: 2007
Date of revision:
Handle: RePEc:cdi:wpaper:927
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  1. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  2. Caroline Freund, 2000. "Different Paths To Free Trade: The Gains From Regionalism," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1317-1341, November.
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  12. Paul Krugman, 1991. "The move toward free trade zones," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-58.
  13. Masahisa Fujita & Paul Krugman & Anthony J. Venables, 2001. "The Spatial Economy: Cities, Regions, and International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262561476, June.
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  15. Baier, Scott L. & Bergstrand, Jeffrey H., 2004. "Economic determinants of free trade agreements," Journal of International Economics, Elsevier, vol. 64(1), pages 29-63, October.
  16. Paul Collier & Jan Willem Gunning, 1998. "Explaining African economic performance," Economics Series Working Papers WPS/1997-02.2, University of Oxford, Department of Economics.
  17. Busse, Matthias, 2003. "Tariffs, Transport Costs and the WTO Doha Round: The Case of Developing Countries," Estey Centre Journal of International Law and Trade Policy, Estey Centre for Law and Economics in International Trade, vol. 4(1).
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