Brazil) in each sample period.<sup>25</sup> If a partner has a larger comparative advantage in a certain good then that may affect the preferential tariff that Argentina gives to that partner, given that the partner stands to benefit more from a preference in that good. We thus calculate an index of RCA that is based on Balassa (1965) for each 4-digit ISIC sector and country. The index is given by RCA= (Xij⁄Xtj)⁄(Xiw⁄Xtw) , where _Xij_ and _Xtj_ denote exports of product _i_ by country _j_ and total exports by country _j_ , respectively, and _Xiw_ and _Xtw_ are exports of product _i_ and total exports by the world, respectively. A value greater than one indicates that the country has a revealed comparative advantage in that product relative to the world. We obtain the bilateral export data needed to construct the indexes of revealed comparative advantage from UN Comtrade.

The fourth issue involves the other potential contribution of our paper, which is to search for explanations of the potential causes of the variation in relative trade liberalization outcomes that we observe for Argentina and Brazil. In particular, since MERCOSUR eventually became a customs union during this period, we explore whether its members may be able to exploit their joint market power via the common external tariff. This is illustrated by a number of theoretical papers that have shown how customs unions may create new incentives for members to increase external levels of import protection, relative to when the agreement was “only” a free trade area.<sup>26</sup> To capture this potential effect, we introduce measures of market power that rely on estimates of the inverse of the export supply elasticity that the policy-imposing country faces in an industry. For this we use the newly available foreign export supply elasticities provided by Nicita, Olarreaga and Silva (2015). Since there are no estimates of the export supply elasticities faced by MERCOSUR as a block, we proxy for the change in market power due to the customs union formation by first calculating the minimum of the export supply elasticities faced by the four MERCOSUR members, and then measuring the change in the inverse export supply elasticity, from that of the policy-imposing country to the inverse of the minimum

> 25 Export data from WITS are available for most countries starting around 1990. We exclude Uruguay because its export data start only in 1994.

> 26 For example, Kennan and Riezman (1990) show the existence of a tariff externality arising under a customs union. When a country imposes a tariff, the terms of trade of the other member improves when it is also an importer of that good, and this externality is internalized under a customs union because tariffs are set jointly. This tariff coordination effect means that, by coordinating their tariffs as one larger country, the members will want to raise their external tariffs to shift their terms of trade in their favor. Krugman (1991) shows that external tariffs will rise after the formation of a customs union because its members will want to take advantage of the increased size of the bloc to improve their terms of trade. See also Bond and Syropoulos (1996) and Syropoulos (1999).

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