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)| false Summers, Lawrence, 1993, “ Regionalism and the World Trading System,” In Policy Implications of Trade and Currency, Proceedings of a Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming( Kansas City, Missouri: Federal Reserve Bank of Kansas City).
Yeats, Alexander J., 1997, “Does MERCOSUR’S Trade Performance Raise Concerns About the Effects of Regional Trade Arrangements?” Policy Research Working Paper 1729 (Washington: World Bank).
Mr. Zhu was a summer intern at the IMF Institute during 2003. The authors are grateful to Adolfo Barajas, Mercedes Da Costa, Andrew Feltenstein, and Yongzheng Yang for their very useful comments. Remaining errors are the responsibility of the authors.
The four trading blocs in the Western Hemisphere are: The North American Free Trade Agreement (NAFTA); Southern Common Market (MERCOSUR); Central American Common Market (CACM); and the Andean Community.
This optimistic viewpoint, together with frustration about the slow pace of multilateral negotiations, has had policy implications. The United States, a supporter of multilateralism, became an active participant in RTAs. In 1985 the United States signed its first bilateral trade agreement with Israel, and since then it has orchestrated several trade agreements, including NAFTA. Furthermore, the United States is expected to participate in the 34-nation Free Trade Area of the Americas (FTAA), the largest trading bloc in history, which is slated to take effect in 2005.
Arguably, security, democracy, and upholding the rule of law might be major reasons other than trade behind the formation of blocs.
For a review of recent theoretical treatments, see Frankel (1997) and Anderson and Van Wincoop (2001).
“Trade integration” reflects intra-bloc trade resulting from the regional trading agreement. However, not necessarily does it reflect “trade creation.” This is because more intra-bloc trade could instead reflect a shift from low-cost producers in the rest of the world to higher cost producers in the regional trading bloc.
As indicated by CSTB, there are three main reasons for using a nonlinear specification of the gravity equation: (1) it allows one to use zero entries in the trade data; (2) when GDP goes to zero, trade should be zero, which is only captured by a nonlinear specification; and (3) the nonlinear regression has a better fit than the linear one. We think that an additional reason is that when running alternative regression specifications (not reported here) we found that error terms behave better under a nonlinear than they do under a linear specification.
Let the subscript b represent the four blocs in the Western Hemisphere: 1, …, 4. If country i (exporter) belongs to bloc 1, but country j (importer) does not belong to bloc 1, then PTEi1 = 1. If j (importer) belongs to bloc 1, but i (exporter) does not belong to bloc 1, then PTIj1 = 1. Otherwise, if i and j either both belong to the same bloc or do not belong to any bloc, then PTEib and PTIjb are both zero.
Although we focus on the four trading blocs in the Western Hemisphere, in our estimations other large trading blocs outside the region are also taken into account. However, when we do this, results do not change significantly.
It is not necessary to include the world GDP in equation 5 as suggested by equation 4, in view of the fact that we run a regression across the countries in our sample for each year. This variable, the world GDP, of course, does not vary across countries in a given year.
CSTB (2002, p. 3) define globalization as “the rapid increase in international trade spurred by advances in technology that have decreased the costs of trade over time.”
Both exports and imports have problems. Export data might not be available in some developing countries, whereas import data might be contaminated by the noise component of trade costs, in turn affected by movements in oil prices. This might explain the correlation that CSTB found between the estimated coefficient for distance and the oil price. Export data are free of the volatility induced by transportation costs, thus giving us a clearer picture of global trade.
This result, which is consistent with previous research, would seem to indicate that NAFTA was not a natural trading bloc. However, this is not necessarily the case, because Mexico in that period was a relatively closed economy (an import substitution scheme had been in place there since the late 1940s, as in most countries in Latin America), and Mexican exports were dominated by oil.