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A traditional view of regional trade integration, such as that introduced by the Mercosur agreement between Argentina, Brazil, Paraguay and Uruguay in 1991, is that it can exacerbate inefficiencies: trade between countries within the region increases, whilst trade with other countries in the world, whose industries may be more efficient, drops due to the regional system of tariffs. An alternative view is that trade integration can actually cause tariffs between the region and the rest of the world to decline: if the level of tariff protection in an industry is due in part to political power wielded by that industry, then as the political power of that industry diminishes with trade integration, so will the level of protection afforded to it.

This paper empirically examines the validity of this alternative view, using regression analysis of a detailed cross-industry data set on intra-regional and extra-regional trade and tariffs in the Mercosur region over the period 1991-96, and focussing on Argentina.

It finds that Argentine industries that declined with the onset of the free trade agreement found their political power diminished; as the political power that had kept external tariffs high in the pre-Mercosur regime waned, the tariffs dropped. Specifically, external tariffs dropped in industries experiencing trade diversion, that is, industries in which imports from Brazil initially increased at the expense of imports from the rest of the world after the Mercosur agreement was signed.

The paper then explains the implications of these results for regional trade areas such as Mercosur. When trade barriers were removed on trade between Mercosur countries but maintained between Mercosur and the rest of the world, the initial effect was for trade to be diverted from the rest of the world towards the less efficient industries in Mercosur countries. But on the basis of the results, the paper argues that this effect diminished over time as the less efficient industries lost their political power within each country. Thus the results make a case for free trade areas and regional integration.

The paper concludes by recommending extensions to this research. Alternative models of the political economy of regional trade agreements could be tested, including several based on imperfectly competitive market structures and models concerned with the ability of industries to lobby government successfully.

Summary originally provided by GDNet, an Eldis content partner

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