Regional Trading Arrangement: Natural or Super-Natural?

16 Pages Posted: 12 Jul 2000

See all articles by Jeffrey A. Frankel

Jeffrey A. Frankel

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Ernesto Stein

Inter-American Development Bank (IDB)

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: January 1996

Abstract

This paper summarizes recent research by the authors on the effects of free trade areas (FTAs). Within our model, which emphasizes inter-continental transport costs, several conclusions arise. (1) FTAs are likely to be detrimental over a moderate range of parameter values, even if drawn along natural regional lines. (2) A small margin of preferences for neighbors is beneficial. (3) Optimal preferences depend on the parameters, particularly on transport costs. (4) If preferences are raised further, they enter the zone of negative returns to regionalization, and eventually the super-natural zone, where welfare is lower than under the MFN status quo. Estimates from the gravity model suggest the world system may already be in the super-natural zone. The core model leaves out many factors. But we have pursued a variety of extensions by now. Perhaps the two most important are generalizing the highly stylized model of trade (to include factor endowments), and relaxing the assumption that the inter-bloc level of tariffs remains fixed. In the latter case, allowing tariffs to be endogenous yields a much more optimistic outlook for the effects of FTAs.

Suggested Citation

Frankel, Jeffrey A. and Stein, Ernesto Hugo and Wei, Shang-Jin, Regional Trading Arrangement: Natural or Super-Natural? (January 1996). NBER Working Paper No. w5431, Available at SSRN: https://ssrn.com/abstract=225489

Jeffrey A. Frankel (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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Ernesto Hugo Stein

Inter-American Development Bank (IDB) ( email )

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Shang-Jin Wei

Columbia Business School - Finance and Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Tsinghua University - School of Economics & Management

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