The determinants of regional exchange in Mercosur: geography and trade liberalization

Abstract

Since the mid-eighties many Latin American countries have been involved in a process of trade liberalization. The direct consequence of this liberalization was a strong increase in international trade flows between these countries and the rest of the world. This raise in the overall level of international trade has also been accompanied by an even stronger increase in regional exchange of goods and services. What explains this upsurge in trade flows among Latin America countries? What role have played commercial policies in this phenomenon? In particular, have unilateral -non preferential- trade liberalization schemes played an important role in this phenomenon? What about the effect of sub-regional liberalizations schemes that became popular in the 1990s? . How important is geography (distance) and "neighborhood" in explaining this increase in regional trade? The purpose of this paper is to address these questions, concentrating our attention on the countries belonging to MERCOSUR. Both the theoretical analysis and the empirical evidence suggest that unilateral trade liberalization couple with geography has been an important factor at work. Mercosur itself -with its tariff preferences- was also an element that contributed to raise trade within the area; nevertheless, its quantitative importance is reduced once we control for the other variables.