[i<sup>7</sup> lcy RESEARCH WORKING PAPER 1729

# Summary findings

In discussions about regional trade arrangements (RTAs), one concern has been whether the discriminatory trade barriers applied in RTAs encourage high-cost imports from member countries at the expense of lower-cost goods from nonmembers. But evaluations of the impact of RTAs have been hampered by a lack of appropriate empirical procedures for assessing their influence on the level and direction of trade.

Yeats employs a new index for analyzing the static trade effects of an RTA. He examines changes in the regional "orientation" of exports and shows how this information can be employed in connection with the "revealed" comparative advantage (RCA) index to identify apparent "inefficiencies" in trade patterns. He applies the approach to statistics on Mercosur countries' exports to determine if recent trade is evolving along lines current compatible with these countries' current comparative advantage.

He does riot comment on the many other possible effects of RTAs, such as benefits from political cooperation, enhancing the credibility of reform strategies, or dynamic gains from trade. Nor does he focus directly on changes in trade with nonmembers, changes that accelerated rapidly because of the 1988-91 liberalization of trade in Mercosur countries. Thus the paper does not address the net welfare effects of trade creation and diversion relative to the 1988 trade policies of member countries.

The results show the most dynamic (fast-growing) products in Mercosur's intra-trade generally are capitalintensive goods in which members have not displayed a strong export performance in outside markets. Neither the RCA indices nor statistics about factor proportions indicate that Mercosur has a comparative advantage in those products. The evidence suggests that Mercosur's own trade barriers are responsible for these trade changes. Most-favored-nation tariffs on the fast-growing products are above the average for all imports and provide Mercosur members with significant preferences. These findings constitute evidence of the potential adverse effects of regional trade arrangements on members and on third countries, as judged by the variance in their trade patterns from what current comparative advantage would predict. Although there are other possible standards, the counterfactual comparison used is an equivalent degree of liberalization on a nondiscriminatory basis. Given the recent proliferation of RTAs, they highlight the need for further empirical research on the domestic and international effects of these arrangements, to better assess the pros and cons of regionalism.

This paper-a product of the International Trade Division, International Economics Department-is part of a larger effort in the department to study regionalism and development. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contactJennifer Ngaine, room NS-060, telephone 202-473-7947, fax 202522-1159, Internet address trade@worldbank.org. February 1997. (33 pages) _'The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center