Transport costs and "natural" integration in Mercosur

Geographic proximity and lower transportation costs are probably not enough for Mercosur to reap big rewards as a "natural" trading bloc.

Amjadi and Winters explore the argument that trade between the Mercosur countries should be stimulated by preferential policies because of their geographic proximity. That is, that the Mercosur countries are candidates for "natural" integration.

They find that, on average, transportation margins on trade within Mercosur and between Mercosur and Chile are about 6 percentage points lower than on trade with the rest of the world. That is a significant margin, and one that was reflected in the countries' trade patterns even before regional trade agreements reduced the policy based barriers to mutual trade. But it is probably not large enough, in and of itself (without other benefits), to make the introduction of trade preferences desirable.

Amjadi and Winters also explore the argument that absolutely high transportation costs between Mercosur and the rest of the world (that is, not relative to intra Mercosur costs) justify regional trade preferences. For this to apply the introduction of trade preferences must cause the Mercosur countries to cease importing some goods from the rest of the world completely. While Mercosur rest of the world transport costs certainly are high, trade patterns suggest that very few goods will cease to be imported from the rest of the world.

Finally, Amjadi and Winters find that transport margins on imports are, on average, 2 to 4 percentage points higher for Mercosur countries than for the United States. Further research on why this is so is necessary before one can conclude that avoidable inefficiencies are involved.

This paper a product of the International Trade Division, International Economics Department is part of a larger effort by the department and the Latin America and the Caribbean Region to identify ways to "make the most of Mercosur." Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Jennifer Ngaine, room N5056, telephone 2024737947, fax 2025221159, Internet address trade@worldbank.org. (33 pages)

The full report is available on the World Bank FTP server