Financial implications of regional trade accords

Eduardo Fernandez-Arias and Mark Spiegel

No 95-01, Working Papers in Applied Economic Theory from Federal Reserve Bank of San Francisco

Abstract: We examine the implications of a North-South trade accord where investments in the Southern partner nation exhibit country risk. Our analysis demonstrates that North-South trade accords can serve as \"credibility-enhancing\" mechanisms towards treatment of foreign investment, inducing additional foreign capital inflows. We then examine the issues of trade and financial creation and diversion under the accord. The presence of sovereign risk changes the tradeoffs between trade creation and diversion, enhancing the potential for welfare-increasing trade-diverting regional trade accords.

Keywords: International trade; Free trade; North American Free Trade Agreement (search for similar items in EconPapers)
Date: 1995
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