Does Mercosur's trade performance raise concerns about the effects of regional trade arrangements?

A concern about regional trade arrangements (RTAs) is whether the discriminatory trade barriers applied to RTAs encourage high-cost imports from member countries at the expense of nonmember lower-cost goods. RTA impact evaluations have been hampered by a lack of appropriate empirical procedures for assessing their influence on trade level and direction. The author employs a new index for analyzing the static trade effects of an RTA. He examines export regional orientation changes combined with the revealed comparative advantage (RCA) index to identify trade pattern inefficiencies. This is applied to Mercosur countries'export statistics to determine if recent trade is evolving compatible with the countries'current comparative advantage. The results show the dynamic products in Mercosur's intra-trade are capital intensive goods which members have not displayed a strong export performance in outside markets. Neither the RCA indices nor factor proportion statistics indicate that Mercosur has a comparative advantage in those products. The evidence suggests Mercosur's trade barriers are responsible for the trade changes. Most favored nation tariffs on the fast growing products are above the average for all imports and provide Mercosur members with significant preferences. These findings constitute evidence on the potential adverse effects of regional trade arrangements on members and on third countries. Given the recent proliferation of RTAs, they highlight the need for further empirical research on the domestic and international effects of these arrangements, to better assess the pros and cons of regionalism.