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New Empirical Insights into the “Natural Trading Partner” Hypothesis for CARICOM Countries

  • Khadan, Jeetendra
  • Hosein, Roger

The central notion of the natural trading partner hypothesis is that a Free Trade Agreement (FTA) will be welfare enhancing for members if there is a strong level of bilateral trade complementarity among their trade structures. This paper presents an empirical examination of this issue with reference to a small developing trade bloc–the Caribbean Community (CARICOM) and its trading partners. The trade intensity index model is used to assess the determinants of intra-CARICOM and extra-CARICOM trade, placing focus on trade complementarity. The results showed that intra-CARICOM trade complementarity is low and concentrated in a few primary industries which can provide a possible explanation for the persistent low levels of intra-CARICOM trade. The findings also indicate that trade complementarity is generally low between CARICOM countries and their proposed FTA partners in the European Union (EU) and North America. The best natural trading partners for CARICOM countries are then identified based on a ranking of countries from 7 regions (CARICOM, the EU, North America, Asia, Central America, Latin America and Africa).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50493.

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Date of creation: 08 Oct 2013
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Handle: RePEc:pra:mprapa:50493
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  1. Drysdale, Peter & Garnaut, Ross, 1982. "Trade Intensities and the Analysis of Bilateral Trade Flows in a Many-Country World : A Survey," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 22(2), pages 62-84, February.
  2. Khwaja Sarmad & Riaz Mahmood, 1988. "Prospects for Expanding Trade between SAARC and ASEAN Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 27(2), pages 131-136.
  3. Anne O. Krueger, 1999. "Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist?," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 105-124, Fall.
  4. Yamazawa, Ippei, 1970. "Intensity Analysis of World Trade Flow," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 10(2), pages 61-90, February.
  5. Shamim Shakur & Chris Nees, 2011. "An application of the natural trading partner hypothesis to New Zealand- ASEAN trade," Economics Bulletin, AccessEcon, vol. 31(4), pages 3077-3088.
  6. Schiff, Maurice, 2001. "Will the Real “Natural Trading Partner” Please Stand Up?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 16, pages 245-261.
  7. Paul Krugman, 1991. "The move toward free trade zones," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 5-25.
  8. Vollrath, Thomas L., 2003. "North American Agricultural Market Integration And Its Impact On The Food And Fiber System," Agricultural Information Bulletins 33639, United States Department of Agriculture, Economic Research Service.
  9. Pravin Krishna, 2003. "Are Regional Trading Partners "Natural"?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 202-231, February.
  10. Peter Drysdale & Xinpeng Xu, 2004. "Taiwan'S Role In The Economic Architecture Of East Asia And The Pacific," Trade Working Papers 22865, East Asian Bureau of Economic Research.
  11. A.R. Kemal, 2004. "Exploring Pakistan’s Regional Economic Cooperation Potential," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 43(4), pages 313-334.
  12. Kandogan, Yener, 2008. "Regionalism versus Multilateralism: Evidence for the Natural Trade Partners Theory from the Euro-Mediterranean Region?," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 23, pages 138-160.
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