Regional Integration and the Prices of Imports: An Empirical Investigation

Abstract

For the first time, the effects of regional trading preferences on members and on the rest of the world are investigated by examining their effects on the prices at which trade occurs. The case studies how Spanish accession to the European Community affected the prices of imports from the European Community, Japan and the United States. Winters and Chang explore the effects on the terms of trade of regional economic integration. They show why it is an appropriate measure of the welfare effects of such integration, comparing it with the many ex post studies that base their conclusions on changes in the import shares of member and nonmember countries. They demonstrate, by using a simple strategic model, how member countries might gain in their terms of trade, and nonmembers lose, through a lowering of preferential tariffs. Most important, they show that measuring such price effects, though difficult, is feasible.

This is the first ex post study of its kind, they believe, and an improvement over previous ex post studies on how integration affects the rest of the world. Using finely disaggregated data about Spanish imports of finished manufactures from major OECD trading partners, despite their noisiness, they found a consistent story over all of the country pairs examined. They find that nonmembers (in this case, Japan and the United States) suffered detectable losses in terms of trade relative to European Community competitors in Spanish import markets for differentiated goods.

An earlier version of this paper - a product of the International Trade Division, International Economics Department - was presented at a North American Economics and Finance Association session during meetings of the Allied Social Science Association, January 1996, in San Francisco.