Skip to main content
SpringerLink
Log in

MERCOSUR in gravity: an accounting approach to analyzing its trade effects

  • Original Paper
  • Published:
International Economics and Economic Policy Aims and scope Submit manuscript

Abstract

This paper aims at unveiling the roots of integration-induced trade effects for MERCOSUR. For this purpose, its methodology combines previous dummy-variables- and continuous variable approaches to identifying trade creation and trade diversion effects in a gravity model framework. Applying a straightforward accounting exercise to the integration-induced trade effects which are found for MERCOSUR en bloc, two results are central: Firstly, with sectoral exceptions, I generally identify pure trade creating effects on the import side but also find trade diversion with associate countries when refining extra-bloc country status. Secondly, while extra-bloc import growth seems to be driven predominantly by non-tariff determinants, trade creation in pooled commodity imports for the largest fraction stems from differences in the tariff treatment between trading partners.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

Notes

  1. More distantly related, a number of studies (e.g. Chang and Hayakawa 2010; Bektasoglu et al. 2017) derive estimates of NTMs from the joint incorporation of integration dummy- and tariff variables in a gravity model framework which are then used to simulate welfare effect of trade policies in computable general equilibrium (CGE) models.

  2. The country sample includes MERCOSUR’s four original member countries and the bloc’s 26 major import partners generalized over the time period from 1989 to 2012 (see Appendix Table 4 for the complete list of countries considered). While an earlier starting time series would allow to capture potential phasing-in trade developments prior to the bloc’s formal establishment in 1991, the dataset’s starting year is set limits due to the availability of tariff data for MERCOSUR member countries.

  3. MERCOSUR entered into force on 29 November, 1991. For this reason, 1992 is considered as the bloc’s first full year of operation.

  4. Ideally, one would incorporate both the directly applied tariff and relative tariff treatment conditional on the case that the tariff imposing country is a member of MERCOSUR. This is appropriate, however, only for the latter for a single reason. In technical terms, \( {\tau}_{ijkt}^M \) is a classic interaction term between relative tariff treatment applied by any of the sample’s importers and intra ijt . Consequently, any variation of the variable exclusively derives from the variation of relative tariff treatment applied by MERCOSUR member countries. By comparison, relative tariff treatment applied by non-MERCOSUR importers throughout takes zero value exactly. As this implies neither above nor below average relative tariff treatment, it could be referred to as “neutral” tariff treatment.

    Admittedly, a negative implication arises from this procedure as the estimation of the impact of MERCOSUR member countries’ tariff policy on their import patterns also relies on the information of neutrally set relative tariff policy applied by non-MERCOSUR importers. As a robustness check, I therefore additionally estimate the model specification in equation (2) using unconditional relative tariff treatment which, however, only marginally alters the results presented below.

    In sharp contrast, interacting the directly applied tariff variable and intra ijt would yield zero tariffs applied by non-MERCOSUR importers which, referring to the above used terminology, cannot be regarded as “neutral” tariff treatment and may lead to serious distortions in estimation.

  5. While tariff data are available at commodity levels for country pairs, it is currently still nearly impossible to obtain reliable data on the various NTMs for a larger sample of countries. For this reason, trade effects accounting in this paper is restricted to unveiling the contribution of MERCOSUR’s tariff policy to its integration-induced trade effects.

  6. Another frequently applied option to control for multilateral trade resistance is the use of ad-hoc proxy measures, as is done for example in Carrère (2006), Belke and Spies (2008) or Gómez-Herrera (2013). The approach, however, has been criticized to a similar extent (compare e.g. Head and Mayer 2013) due to its lack in theoretical justification. Unreported estimation results incorporating a set of various ad-hoc multilateral trade resistance measures —addressing trade costs arising from bilateral distance, contiguity, language similarity and real exchange rate developments— in the model specifications presented above are nonetheless nearly identical to those discussed in section 4 (results can be provided upon request).

  7. This interpretation is further supported by collinearity diagnostic tests including the tolerance that is found to be below 0.1.

  8. Following Kennedy (1981), marginal effects of dummy variables’ coefficient estimates are calculated as \( \left(\exp \left\{{\widehat{\beta}}_k-\frac{1}{2}\widehat{V}\left({\widehat{\beta}}_k\right)\right\}-1\right)\times 100 \) where \( {\widehat{\beta}}_k \) is a dummy variable’s coefficient estimate and \( \widehat{V}\left({\widehat{\beta}}_k\right) \) denotes its variance.

  9. Even though the formation of MERCOSUR has led to an increase in intra-bloc trade, its share in total trade for MERCOSUR en bloc and in particular for Argentina and Brazil is still low compared to other trade blocs such as the EU (UN Comtrade 2014). In this context, while monetary integration in MERCOSUR has occasionally been discussed academically (e.g. Eichengreen 1998) and even been proposed at government level, Belke and Gros (2002) argue that extra-regional exchange rate fixation (towards the US-Dollar or the Euro) would provide greater benefit in terms of employment and investment for MERCOSUR due to these structural differences compared to EU.

  10. Compare Magee (2008) for anticipation effects of trade agreements on bilateral trade.

  11. There is a slight increase in the magnitude of extra ijt  compared to its counterpart in Table 1 as trade diversion of associate countries’ imports is no longer captured by the variable.

  12. Cardamone (2011) gives a similar interpretation for negatively signed preferential margin estimates.

References

  • Anderson JE (1979) A Theoretical Foundation for the Gravity Equation. Am Econ Rev 69(1):106–116

    Google Scholar 

  • Anderson JE, van Wincoop E (2003) Gravity with Gravitas: A Solution to the Border Puzzle. Am Econ Rev 93(1):170–192

    Article  Google Scholar 

  • Anderson JE, van Wincoop E (2004) Trade Costs. J Econ Lit 42(3):691–751

    Article  Google Scholar 

  • Baer W, Silva P (2014) Mercosul: Its Successes and Failures During Its First Two Decades. Lat Am Bus Rev 15(3–4):193–208

    Article  Google Scholar 

  • Baier SL, Bergstrand JH (2004) Economic Determinants of Free Trade Agreements. J Int Econ 64(1):29–63

    Article  Google Scholar 

  • Baier SL, Bergstrand JH (2007) Do Free Trade Agreements Actually Increase Members’ International Trade. J Int Econ 71(1):72–95

    Article  Google Scholar 

  • Baldwin R, Di Nino V (2006) Euros and Zeros: The Common Currency Effect on Trade in New Goods, NBER Working Paper 12673

  • Baldwin R, Taglioni D (2006) Gravity for Dummies and Dummies for Gravity Equations, NBER Working Papers 12516

  • Bechle K (2011) Kein Auslaufmodell: 20 Jahre MERCOSUR. GIGA Focus Lateinamerika 3:1–8

  • Bektasoglu B, Engelbert T, Brockmeier M (2017) The Effect of Aggregation Bias: An NTB-modelling Analysis of Turkey’s Agro-food Trade with the EU. World Econ 40(10):2255–2276

    Article  Google Scholar 

  • Belke A, Gros D (2002) Monetary Integration in the Southern Cone. N Am J Econ Finance 13(3):323–349

    Article  Google Scholar 

  • Belke A, Spies J (2008) Enlarging the EMU to the East: What Effects on Trade? Empirica 35(4):369–389

    Article  Google Scholar 

  • Bergstrand JH (1985) The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence. Rev Econ Stat 67(3):474–481

    Article  Google Scholar 

  • Bergstrand JH (1989) The Generalised Gravity Equation, Monopolistic Competition, and the Factor-proportions Theory in International Trade. Rev Econ Stat 71(1):143–153

    Article  Google Scholar 

  • Cardamone P (2007) A Survey of the Assessments of the Effectiveness of Preferential Trade Agreements Using Gravity Models. Economia Internazionale / International Economics 60(4):421–473

    Google Scholar 

  • Cardamone P (2011) Trade Impact of European Union Preferences: An Analysis with Monthly Data. In: De Benedictis L, Salvatici L (eds) The Trade Impact of European Union Preferential Policies: An Analysis Through Gravity Models. Springer, Berlin

    Google Scholar 

  • Carrère C (2006) Revisiting the Effects of Regional Trade Agreements on Trade Flows with Proper Specification of the Gravity Model. Eur Econ Rev 50(2):223–247

    Article  Google Scholar 

  • Carrère C, de Melo J, Tumurchudur B (2010) Disentangling Market Access Effects of Preferential Trading Arrangements with an Application for ASEAN Members under an ASEAN–EU FTA. World Econ 33(1):42–59

    Article  Google Scholar 

  • Chang K, Hayakawa K (2010) Border Barriers in Agricultural Trade and the Impact of Their Elimination: Evidence from East Asia. Dev Econ 48(2):232–246

    Article  Google Scholar 

  • Cheong J, Kwak DW, Tang KK (2014) The WTO Puzzle, Multilateral Resistance Terms and Multicollinearity. Appl Econ Lett 21(13):928–933

    Article  Google Scholar 

  • Cipollina M, Salvatici L (2011) Trade Impact of European Union Preferences. In: De Benedictis L, Salvatici L (eds) The Trade Impact of European Union Preferential Policies: An Analysis Through Gravity Models. Springer, Berlin

    Google Scholar 

  • Cipollina M, Laborde D, Salvatici L (2013) Do Preferential Trade Policies (Actually) Increase Exports? An Analysis of EU Trade Policies, Selected Paper prepared for presentation at the Agricultural & Applied Economics Association’s 2013 Annual Meeting, 4–6 August, Washington, D.C.

  • Cipollina M, De Benedictis L, Salvatici L, Vicarelli C (2016) Policy Measurement and Multilateral Resistance in Gravity Models, MPRA Paper No. 75255

  • Coulibaly S (2009) Evaluating the Trade Effect of Developing Regional Trade Agreements: A Semi-parametric Approach. J Econ Integration 24(4):709–743

    Article  Google Scholar 

  • Cuenca García E, Navarro Pabsdorf M, Gómez Herrera E (2013) The Gravity Model Analysis: An Application on MERCOSUR Trade Flows. J Econ Policy Reform 16(4):336–348

    Article  Google Scholar 

  • De Benedictis L, Taglioni D (2011) The Gravity Model in International Trade. In: De Benedictis L, Salvatici L (eds) The Trade Impact of European Union Preferential Policies: An Analysis Through Gravity Models. Springer, Berlin

    Chapter  Google Scholar 

  • Deardorff AV (1995) Determinants of Bilateral Trade: Does Gravity Work in a Neo-classic World? NBER Working Paper 5377

  • Deardorff AV, Stern RM (1997) Measurement of Non-tariff Barriers, OECD Economics Department Working Papers 179

  • Eaton J, Kortum SS, Sotelo S (2012) International Trade: Linking Micro and Macro, NBER Working Paper 17864

  • Egger PH, Wamser G (2013a) Effects of the Endogenous Scope of Preferentialism on International Goods Trade. The B.E. J Econ Anal Policy 13(2):709–731

    Google Scholar 

  • Egger PH, Wamser G (2013b) Multiple Faces of Preferential Market Access: Their Causes and Consequences. Econ Policy 28(73):143–187

    Article  Google Scholar 

  • Eichengreen B (1998) Does Mercosur Need a Single Currency? NBER Working Paper 6821

  • Estevadeordal A, Goto J, Saez R (2001) The New Regionalism in the Americas: The Case of MERCOSUR. J Econ Integration 16(2):180–202

    Article  Google Scholar 

  • European Commission (2014) Eurostat. http://ec.europa.eu/eurostat/de/data/database. Accessed April 2014 (various dates)

  • Fugazza M, Nicita A (2013) The Direct and Relative Effects of Preferential Market Access. J Int Econ 89(2):357–368

    Article  Google Scholar 

  • Ghosh S, Yamarik S (2004) Are Regional Trading Arrangements Trade Creating? An Application of Extreme Bounds Analysis. J Int Econ 63(2):369–395

    Article  Google Scholar 

  • Gómez-Herrera E (2013) Comparing Alternative Methods to Estimate Gravity Models of Bilateral Trade. Empir Econ 44(3):1087–1111

    Article  Google Scholar 

  • Hayakawa K, Kimura F, Nabeshima K (2014) Non-conventional Provisions in Regional Trade Agreements: Do They Enhance International Trade? J Appl Econ 17(1):113–138

    Article  Google Scholar 

  • Hayakawa K, Ito T, Kimura F (2016) Trade Creation Effects of Regional Trade Agreements: Tariff Reduction versus Non-tariff Barrier Removal. Rev Dev Econ 20(1):317–326

    Article  Google Scholar 

  • Head K, Mayer T (2013) Gravity Equations: Workhorse, Toolkit, and Cookbook, CEPII Working Paper No. 2013-27

  • Helpman E (1987) Imperfect Competition and International Trade: Evidence from Fourteen Industrial Countries. J Jpn Int Econ 1(1):62–81

    Article  Google Scholar 

  • Helpman E, Melitz MJ, Rubenstein Y (2008) Estimating Trade Flows: Trading Partners and Trading Volumes. Q J Econ 123(2):441–487

    Article  Google Scholar 

  • Hoekman B, Nicita A (2011) Trade Policy, Trade Costs, and Developing Country Trade. World Dev 39(12):2069–2079

    Article  Google Scholar 

  • Hornok C (2011) Gravity or Dummies? The Limits of Identification in Gravity Estimations, CeFiG Working Papers 15

  • International Monetary Fund (2014) World Economic Outlook Database. http://www.imf.org/external/pubs/ft/weo/2014/01/weodata/index.aspx. Accessed April 2014 (various dates)

  • Kennedy PE (1981) Estimation with Correctly Interpreted Dummy Variables in Semilogarithmic Equations. Am Econ Rev 71(4):801

    Google Scholar 

  • Leipziger DM, Frischtak C, Kharas HJ, Normand JF (1997) MERCOSUR: Integration and Industrial Policy. World Econ 20(5):585–603

    Article  Google Scholar 

  • Low P, Piermartini R, Richtering J (2005) Multilateral Solutions to the Erosion of Non-reciprocal Preferences in NAMA, ERSD Working Paper 2005–05, World Trade Organization

  • Magee CSP (2008) New Measures of Trade Creation and Trade Diversion. J Int Econ 72(2):349–362

    Article  Google Scholar 

  • Martínez-Zarzoso I, Nowak-Lehmann F, Horsewood N (2009) Are Regional Trading Agreements Beneficial? Static and Dynamic Panel Gravity Models. N Am J Econ Finance 20(1):46–65

    Article  Google Scholar 

  • Martin-Mayoral F, Morán Carofilis G, Cajas Guijarro J (2016) The Effects of Integration Agreements in Western Hemisphere Trade, 1970-2014. J Int Trade Econ Dev 25(5):724–756

    Article  Google Scholar 

  • Mátyás L (1997) Proper Econometric Specification of the Gravity Model. World Econ 20(3):363–368

    Article  Google Scholar 

  • Moncarz P, Vaillant M (2010) Who Wins in South-South Trade Agreements? New Evidence for MERCOSUR. J Appl Econ 13(2):305–334

    Article  Google Scholar 

  • Organization of American States (2014) Foreign Trade Information System. http://www.sice.oas.org/agreements_e.asp. Accessed April 2014 (various dates)

  • Pöyhönen P (1963) A Tentative Model for the Volume of Trade between Countries. Weltwirtschaftliches Arch 90:93–99

    Google Scholar 

  • Santos Silva JMC, Tenreyro S (2006) The Log of Gravity. Rev Econ Stat 88(4):641–658

    Article  Google Scholar 

  • Soloaga I, Winters LA (2001) Regionalism in the Nineties: What Effect on Trade. N Am J Econ Finance 12(1):1–29

    Article  Google Scholar 

  • Tinbergen J (1962) Shaping the World Economy: Suggestions for an International Economic Policy. The Twentieth Century Fund, New York

    Google Scholar 

  • UN Comtrade (2014) International Trade Statistics Database. http://comtrade.un.org. Accessed April 2014 (various dates)

  • Urata S, Okabe M (2014) Trade Creation and Diversion Effects of Regional Trade Agreements: A Product-level Analysis. World Econ 37(2):267–289

    Article  Google Scholar 

  • Vaillant M (2005) MERCOSUR: Southern Integration under Construction. Internationale Politik und Gesellschaft 2:52–75

    Google Scholar 

  • Vaillant M, Vaillant P (2014) European Union-Mercosur Negotiations: A Return to Uncertainties. Lat Am Bus Rev 15(3–4):337–362

    Article  Google Scholar 

  • Viner J (1950) The Customs Union Issue. Carnegie Endowment for International Peace, New York

    Google Scholar 

  • World Bank (2014a) World Development Indicators. http://data.worldbank.org/data-catalog/world-development-indicators. Accessed April 2014 (various dates)

  • World Bank (2014b) World Integrated Trade Solution. http://wits.worldbank.org/WITS. Accessed April 2014 (various dates)

  • World Trade Organization (2008) Protocol of Montevideo on Trade in Services in the MERCOSUR – Report by the Secretariat. Committee on Regional Trade Agreements, Geneva

    Google Scholar 

Download references

Acknowledgements

I am indebted to Joscha Beckmann and Ansgar Belke for valuable comments and suggestions.

Author information

Authors and Affiliations

  1. Ruhr-University Bochum, Bochum, Germany

    Frederik Stender

Authors
  1. Frederik Stender
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Frederik Stender.

Appendices

Appendix 1

Table 4 Country sample
Full size table

Appendix 2

Table 5 Variable summary statistics
Full size table

Appendix 3

Table 6 Variable description and data source
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Stender, F. MERCOSUR in gravity: an accounting approach to analyzing its trade effects. Int Econ Econ Policy 15, 501–522 (2018). https://doi.org/10.1007/s10368-017-0400-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10368-017-0400-8

Keywords

JEL classification

Search

Navigation