Understanding the Impact of South-South Trade Agreements: An Analysis of MERCOSUR’s Effects on Trade Patterns

Abstract

Trade agreements in developing nations, known as South-South agreements, have increasingly been adopted in the past decades as a step towards regional integration and trade liberalization. However, although regional trade agreements (RTAs) are intended to stimulate trade both between member nations and with the rest of the world (ROW), literature on the subject has presented inconclusive and often ambiguous results regarding their impact. The purpose of this study is to reach a deeper understanding of the effects of South-South trade agreements on trade patterns, through an analysis of the South American bloc, Common Market of the South (MERCOSUR). This paper uses a modified gravity model and a first-difference model to estimate the effect of the trade agreement and its tariff schemes on its full members and associated nations. The analysis presents significant evidence of intra-bloc trade creation accompanied by diversion of trade from the ROW as a result of membership to MERCOSUR. Additionally, significant results are also found when examining the impact of internal and external tariff schemes on the altering trade patterns. The findings of this study thus imply a reduction of intra-bloc trade barriers at the expense of commerce with the ROW, suggesting the need for further research analyzing the overall welfare effects of the South-South regional trade agreement on its member nations.