Regional Trading Arrangement: Natural or Super-Natural?

Jeffrey Alexander Frankel (), Ernesto Stein and Shang-Jin Wei

No 5431, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F1 (search for similar items in EconPapers)
Date: Written 1996-01
Note: IFM ITI
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Published as American Economic Review, Vol. 86, no.2 (May 1996). Regional Trading Arrangements, H. Singer, N. Hatti, and R. Tandon, eds., India: BRPC, 2000.

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Related works:
Working Paper: Regional Trading Arrangements: Natural or Super-Natural? (1996)
Journal Article: Regional Trading Arrangements: Natural or Supernatural (1996)
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