Abstract
This article estimates the effects of a hypothetical enlargement of the Mercado Común del Sur (MERCOSUR), depicted by granting MERCOSUR associate member countries a full membership status, on trade in primary agricultural commodities. The empirical investigation is implemented through the multiplicative form of the gravity model. The estimated gravity parameters are used to carry out scenarios that predict the effects of MERCOSUR enlargement on trade in primary agricultural commodities. The predictions reveal that MERCOSUR enlargement would generate significant increases in exports from the full members to the associate members. The predictions also show relatively smaller increases in exports from the associate members to the full members (in value terms), but some important increases in trade among the associate members. Trade diversion effects of MERCOSUR enlargement, which influence trade between full members and from non-member countries to full and associate members, are found to be limited.
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Notes
Article 1 of the Treaty of Asunción states that MERCOSUR shall involve the removal of regional trade barriers between member countries, the adoption of common external tariffs, and the coordination of macroeconomic and sector-specific policies. See The World Bank (2011) for an English version of the Treaty of Asunción.
Member countries were allowed to maintain a list of products (e.g., textile products, wine, and wool products) that are exempt from the zero tariff requirements through the Adaptation Regime to MERCOSUR (ARM). The ARM implies automatic and progressive reduction of tariffs on this list of products until being completely eliminated by January, 1999 for Argentina and Brazil, and by January, 2000 for Paraguay and Uruguay.
See Kaltenthaler and Mora (2002) for a discussion on the political motivations which promoted the formation of MERCOSUR.
The parliaments of Argentina and Uruguay have already approved Venezuela’s membership. Also, Brazil’s Foreign Relations Committee has also approved Venezuela membership in November of 2009. The final step for Venezuela toward becoming a full member of MERCOSUR awaits the approval of Paraguay’s parliament.
It is important to note the formation of the Unión de Naciones Suramericanas (UNASUR) or the Union of South American Nations through the UNASUR Constitutive Treaty, signed on May 23 of 2008. One of the objectives of UNASUR is to enhance the integration between the MERCOSUR and the CAN blocs.
In 2008, MERCOSUR full members produced 83.8 million Metric Tonnes (MT) of maize and 112.7 million MT of soybean. MERCOSUR associate members produced 9.4 million MT of maize and 1.5 million MT of soybean. Also, in 2008, the aggregate production of the full members reached 12.7 million MT of beef, 11.5 million MT of chicken, and 3.4 million MT of pork. The corresponding statistics for the associate members are 2.3 million MT of beef, 3.7 million MT of chicken, and 1.3 million MT of pork. These production statistics are collected from the Food and Agriculture Organization Statistics (FAOSTAT).
Amjadi and Winters (1999) analyzed the implications of transportation costs for the original MERCOSUR bloc and for an enlarged MERCOSUR region that includes Chile. They found that intra-MERCOSUR and MERCOSUR-plus-Chile transportation margins are lower than those on trade with the rest of the world. However, they concluded that these margins are not sufficiently low to characterize MERCOSUR as a natural bloc that warrants the introduction of trade preferences.
Many empirical studies found positive effects of MERCOSUR on intra-regional trade at the aggregate and industrial levels using gravity models (e.g., Frankel 1997; Mayer and Zignago 2005). Chang and Winters (2002) employed a strategic pricing game in segmented markets and empirically showed that MERCOSUR led to improvements in terms of trade. Some studies investigated trade relationships between MERCOSUR and other trading blocs. For example, Martinez-Zarzoso and Nowak-Lehmann (2003, 2004) and Nowak-Lehmann and Martinez-Zarzoso (2005) used gravity models to examine the trade patterns between MERCOSUR and the EU.
The assumption of a “constant” elasticity of transformation (and of a “constant” elasticity of substitution for differentiated products in demand-based frameworks) is regularly adopted through the gravity literature (e.g., Bergstrand 1985, 1989; Anderson and van Wincoop 2003; Feenstra 2004). It is mainly embraced for theoretical tractability and empirical feasibility.
The bilateral geographic distance is essentially included in the gravity equation to capture the distance-related trade costs (e.g., transportation and information costs). Also, the common language and contiguity binary variables are normally included in the empirical gravity equation (e.g., Bussière et al. 2008; Lambert and McKoy 2009). Countries sharing a common language are expected to have an easier flow of information. Contiguous countries are expected to have more developed bilateral trade infrastructures (e.g., common highways and railroads) and stronger bilateral business and social networks (e.g., cross-border travels and transactions).
The proportions of zero bilateral trade observations are above 65 % across agricultural commodities in the dataset. Santos Silva and Tenreyro (2006) underlined two important issues related to the estimation of the log-linear form of the gravity equation in the presence of zero bilateral trade observations. First, given that the logarithm of zero bilateral trade is undefined, then, replacing the zero values with ones will likely produce biased estimates. Alternatively, dropping the zero observations from the dataset and carrying out the empirical estimation for positive observations will generate a sample selection bias. Second, the Jensen inequality states that \( E\left[ {\ln \left( v \right)} \right] \ne \ln \left[ {E\left( v \right)} \right] \). This inequality implies that a log-linear specification of the empirical gravity equation cannot be used to derive predictions for bilateral trade levels.
MERCOSUR enlargement may not necessarily result in non-tariff preferences and common external tariff rates equivalent to those currently applied by MERCOSUR full member countries. However, these are convenient benchmarks when carrying out the simulations.
For instance, the positive estimates of the CET parameter imply negative implications of tariff barriers for trade flows.
Bootstrap procedures are not convenient in the present case because the non-linearity makes the estimator sensitive to the choice of starting values.
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The author would like to thank two anonymous reviewers for providing valuable comments and suggestions, and the editor-in-chief, Professor George Hondroyiannis, for evaluating this study.
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Appendix: Data description
Appendix: Data description
The empirical analysis of MERCOSUR enlargement is implemented for five principal agricultural commodities in Latin America: beef, chicken, maize, pork, and soybean. The definition of these primary agricultural commodities corresponds to the four-digit Harmonized System (HS) categories of 0201-plus-0202, 0207, 1005, 0203, and 1201, respectively. The panel dataset covers bilateral trade between 41 major trading countries over the period 2006–2008. The list of countries and the designation of MERCOSUR full and associate membership status and CAN membership status are presented in Table 4. Summary statistics of the dataset are presented in Table 5.
The cost, insurance, and freight values of bilateral trade, reported according to the HS classification, are collected from the United Nations’ COMTRADE database. Applied bilateral tariff rates are sourced from the Trade Analysis and Information System (TRAINS) database. The primary agricultural commodities are defined at the four-digit HS classification and, hence, they cover several tariff lines. When tariff rates vary across a commodity’s tariff lines, a weighted average of tariff rates is computed using import values. Also, Tariff Rate Quotas (TRQs) are applied by some countries on imports of some commodities. A TRQ policy implies that a maximum level of imports is taxed at a low in-quota tariff rate while any additional unit imported is subject to an over-quota tariff rate. As in Ghazalian et al. (2011), applied tariff rates (applied in-quota tariffs when imports are below the quota and applied over-quota tariffs when imports are either equal or above the quota) are used in the empirical investigation. The bilateral geographic distance measure of Head and Mayer (2002), which accounts for the dispersion of the economic activities within each country, is used. The corresponding dataset is sourced from the Centre d’Études Prospectives et d’Informations Internationales (CEPII). The GDP and GDPC datasets are collected from the International Monetary Fund (IMF) World Economic Outlook database. The production size and commodity price datasets are sourced from the Food and Agriculture Organization Statistics (FAOSTAT).
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Ghazalian, P.L. MERCOSUR enlargement: predicting the effects on trade in primary agricultural commodities. Econ Change Restruct 46, 277–297 (2013). https://doi.org/10.1007/s10644-012-9128-1
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DOI: https://doi.org/10.1007/s10644-012-9128-1