MERCOSUR’s role on the regional patterns of imports of its country members: a dynamic panel data approach

With the signature of the Asuncion Treaty by Argentina, Brazil, Paraguay and Uruguay in July 1991, the four countries implemented an ambitious program to reduce tariffs and non-tariff barriers on their reciprocal trade; a common policy toward third countries was implemented in 1995. As MERCOSUR deepened further, intra-zone trade increased its share in total trade. In most cases, increasing intra-zone trade meant an increasing participation of goods where MERCOSUR members did not have a RCA at the beginning of the integration process. Starting from Krugman (1980) monopolistic competitive model for international trade we derive an equation to explain regional patterns of imports. Making use of a recently detailed database on intra-MERCOSUR tariffs we estimate the effect of tariff preferences on the origin of imports of MERCOSUR members between 1991 and 2004. The results show tariff preferences affected imports patterns in the cases of Argentina and Uruguay, and to a less extent also those of Brazil and Paraguay. For the first two countries the results appear to sustain the hypothesis MERCOSUR may have induced a trade diversion effect, from which Brazil would have been the most benefited member.