Continental Trading Blocs: Are They Natural, or Super-Natural?

55 Pages Posted: 26 Jul 2002 Last revised: 22 Jul 2010

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: December 1993

Abstract

Using the gravity model, we find evidence of three continental trading blocs: the Americas, Europe and Pacific Asia. Intra-regional trade exceeds what can be explained by the proximity of a pair of countries, their sizes and GNP/capitas, and whether they share a common border or language. We then turn from the econometrics to the economic welfare implications. Krugman has supplied an argument against a three-bloc world, assuming no transport costs, and another argument in favor, assuming prohibitively high transportation costs between continents. We complete the model for the realistic case where intercontinental transport costs are neither prohibitive nor zero. If transport costs are low, continental Free Trade Areas can reduce welfare. We call such blocs super-natural. Partial liberalization is better than full liberalization within regional Preferential Trading Arrangements, despite the GATT's Article 24. The super-natural zone occurs when the regionalization of trade policy exceeds what is justified by natural factors. Estimates suggest that trading blocs like the current EC are super-natural.

Suggested Citation

Frankel, Jeffrey A. and Stein, Ernesto Hugo and Wei, Shang-Jin, Continental Trading Blocs: Are They Natural, or Super-Natural? (December 1993). NBER Working Paper No. w4588, Available at SSRN: https://ssrn.com/abstract=319592

Jeffrey A. Frankel (Contact Author)

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

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National Bureau of Economic Research (NBER)

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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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New York, NY 10027
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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

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United Kingdom

International Monetary Fund (IMF)

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United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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