The welfare effects of preferential trading agreements are most directly linked to changes in trade prices - that is, the terms of trade.
Chang and Winters use a simple strategic pricing game in segmented markets to measure the effects of MERCOSUR on the pricing of "nonmember" exports to the regional trading bloc. Working with detailed data on unit values and tariffs, they find that the creation of MERCOSUR is associated with significant declines in the prices of nonmembers' exports to the bloc. These can be explained largely by tariff preferences offered to a country's partners.
Focusing on the Brazilian market (by far the largest in MERCOSUR), they show that nonmembers' export prices to Brazil respond to both most-favorable-nation and preferential tariffs. Preferential tariffs induce reductions in nonmember export prices.
This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to understand the effects of regional integration. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Lili Tabada, room MC3-333, telephone 202-473-6896, fax 202-522-1159, Internet address ltabada@worldbank.org. The authors may be contacted at wchang@worldbank.org or l.a.winters @sussex.ac.uk. (57 pages)
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