does mercosur's trade performance raise concerns about …...mercosur was established under the...
TRANSCRIPT
THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1: 1-28
Does Mercosur's Trade Performance Raise Concernsabout the Effects of Regional Trade Arrangements?
Alexander J. Yeats
This study employs a new methodological approach that measures production effi-ciency in changing trade patterns. It shows that the most rapidly growing products inMercosur's intratrade generally are goods in which members do not have a compara-tive advantage and have not been able to export competitively to outside markets. Thisis consistent with substantial trade diversion within the arrangement. Mercosur's dis-criminatory tariffs against nonmembers, which are four to six times higher than thosein arrangements such as the European Union, European Free Trade Area, or NorthAmerican Free Trade Agreement, are likely the cause. Recent further increases inMercosur's tariffs against nonmembers are likely to exacerbate the magnitude of tradediversion.
The recent proliferation of regional trade arrangements among countries raisesseveral legitimate concerns. Primary among these is the fear that the new region-alism will divert attention from the multilateral negotiation process that GATT(General Agreement on Tariffs and Trade, now the World Trade Organization)employs to reduce international trade barriers. Second, some regional trade ar-rangements may raise trade barriers against nonmembers, which could seriouslyundermine the achievements of the GATT. Third, the discriminatory trade barri-ers incorporated within regional arrangements may have undesirable effects.That is, they may cause the sales of members to displace those of more efficientthird countries, thereby denying both consumers and producers access to lower-cost and superior-quality goods. However, assessments of the influence of re-gional arrangements have been hampered by a lack of appropriate and reliableempirical procedures for evaluating their actual effects.
This investigation attempts to determine whether, when used jointly, twoindexes, which measure the regional orientation of exports and revealed com-parative advantage, provide insights concerning the extent to which a re-gional trade arrangement may distort trade from patterns expected on thebasis of efficiency conditions and comparative advantage. As a case study,the analysis focuses on the countries of Mercosur, perhaps the most impor-
Alexander J. Yeats is with the Development Research Group at the World Bank. The author wouldlike to thank L. Alan Winters and Maurice Schiff for many helpful comments on an earlier version ofthis article.
© 1998 The International Bank for Reconstruction and Development/THE WORLD BANK
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
2 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1
tant recent arrangement involving developing countries. In addition,Mercosur's discriminatory tariffs on third-country suppliers are approximatelyfour to six times higher than those in arrangements among industrial coun-tries like the European Union, European Free Trade Area (EFTA), or NAFTA
(North American Free Trade Agreement). Given the magnitude of Mercosur'sdeparture from universal most-favored-nation tariff treatment, this study looksat the trade-diverting and trade-creating potential of the arrangement's dis-criminatory trade barriers. In this respect, it differs from related analysesthat focus on welfare effects.
Mercosur was established under the Treaty of Asuncion, signed on 26 March1991 by the presidents of Argentina, Brazil, Paraguay, and Uruguay. Under theterms of the treaty, staged reductions of tariffs against trade among memberswere to begin in June 1991 with the objective of removing all tariffs on thisexchange by the end of 1994. Most of this study's analysis begins in 1988 be-cause Argentina and Brazil were already implementing some preferential sectoraltrade arrangements by then. By starting with 1988, the study includes the effectsof the strong multilateral liberalizations that Mercosur countries initiated aroundthat period.
Section I analyzes the trade statistics of Mercosur countries to determine ifthe direction and composition of their trade changed significantly during theperiod when the agreement was being implemented. Unless sizable changesoccurred, concerns that trade was actually diverted from more-efficient pro-ducers would appear to be groundless. Section II examines the characteristicsof a new index that measures the changing regional orientation of exports ofspecific goods and then uses the index to analyze recent shifts in the direc-tion of trade. It compares this index with a measure of revealed comparativeadvantage to show how the two can be employed jointly for analyzingpotential inefficiencies in trade patterns. The section analyzes data drawnfrom United Nations sources to determine whether the changing regionalorientation of Mercosur's trade during the period when the agreement wasbeing implemented was consistent with member countries' comparative ad-vantage. Section HI analyzes supplemental information on Mercosur coun-tries' tariffs and nontariff barriers to determine how they might have influ-enced trade patterns. Section IV closes the study with an overall assessmentof the findings and their implications for further research on issues relatingto regionalism.
An important qualifying point should be noted at the outset. The analysis inthis article focuses on only one aspect of Mercosur—its static trade effects. Manycommentators see other benefits stemming from the agreement such as politicalcooperation, enhanced negotiating power, better credibility for the members'general economic reform programs, the possibility of achieving otherwise unat-tainable economies of scale in production, and dynamic gains in trade. These arelegitimate objectives that, if achieved, could offset distortionary trade effects. Inthe present context, however, nothing can be said about them.
Yeats 3
I. RECENT TRENDS IN MERCOSUR TRADE
Available data indicate that the trade patterns of member countries have changedsignificantly since the formation of Mercosur. For example, table 1 provides sum-mary statistics on Mercosur's intratrade and on exports to destinations such as thecountries in the OECD (Organization for Economic Cooperation and Development),NAFTA, or OECD Europe. These data are shown for selected periods from 1979-81to 1994 in order to help determine when the trend changed. This analysis is re-stricted because data with which to explore trade patterns were available only upto and including 1994. This is sufficient to identify the effects of preferential tradepolicies. Some preferences were included in the Argentina-Brazil sectoral agree-ments at the end of the 1980s, and widespread preferences were introduced in thetransition period for Mercosur starting in June 1991. This exercise clearly shedsno light on events since 1994, such as the further progress toward a commonexternal tariff or any progress in the nontrade policy aspects of the agreement.These remain on the agenda for further research.
The earlier intervals in table 1 are three-year periods in order to reduce theinfluence of any annual irregular variations in trade statistics, such as those thatmight accompany significant fluctuations in commodity prices. Statistics for 1993and 1994 are shown separately in order to reflect the recent influence of Mercosuron trade flows. A more detailed analysis of the annual trade data used in theconstruction of table 1 strongly suggests that 1991 was the year in whichintratrade became significantly more important. In June of 1991 Mercosur be-gan to implement discriminatory tariff preferences on intratrade.
The figures reported in table 1 show the increasing relative importance ofMercosur markets for all four member countries. For example, in 1984—86 lessthan 10 percent of Argentina's exports went to Mercosur countries comparedwith 30 percent by 1994. Although the 1984-86 level was lower (about 5 per-cent), a threefold increase also occurred for Brazil's exports to Mercosur (almost14 percent in 1994), while Uruguay's share of exports rose almost 20 percentagepoints (reaching almost 47 percent in 1994). For all member countries takentogether, the 1994 share of exports to Mercosur (reaching 20 percent) was al-most three times the corresponding 1984-86 level.
The data in table 1 reveal two key trends in the direction of Mercosur's ex-ports over the last decade: intra-Mercosur trade became significantly more im-portant at the expense of trade with countries in NAFTA, which remained stableor declined slightly, and of trade with Europe, which declined. Statistics on mem-ber countries' imports also reflect the major increase in the relative importanceof trade between Mercosur members. From 1984-86 to 1994 the share of im-ports originating in member countries rose from 11 to 20 percent. The reorien-tation of Mercosur's trade toward member countries over this full interval, orduring the 1990s, was far greater than that in any other regional arrangement,including EFTA, the European Union, the Association of Southeast Asian Na-tions, and the Canadian-United States Free Trade Arrangement.
Table 1. Trade Destinations for the Mercosur Countries, 1979-81 to 1994
Exporter
Argentina1979-811984-861990-9219931994Brazil1979-811984-861990-9219931994Paraguay1979-811984-861990-9219931994Uruguay1979-811984-861990-9219931994Mercosur1979-811984-861990-9219931994
World(millions of
dollars)
8,322.77,785.2
12,187.113,114.415,803.3
19,556.325,008.632,987.838,679.443,355.2
303.6290.3784.1725.2816.8
1,021.0953.3
1,629.91,603.31,918.1
29,203.634,037.447,588.954,122.261,893.3
OECDcountries
45.044.949.543.640.2
58.264.763.656.157.4
52.748.841.945.836.3
44.041.738.832.630.4
53.959.558.852.251.8
NAFTAcountries
11.414.414.511.913.1
21.629.825.224.524.2
6.63.75.08.27.6
9.814.913.112.310.1
18.225.621.720.920.7
Percentage of total exports
United States
8.711.211.79.7
10.9
18.027.221.420.720.6
5.73.64.77.37.0
8.513.510.19.26.8
14.923.018.317.617.5
Europe
32.528.333.329.325.6
32.729.132.827.629.0
41.343.736.838.029.1
33.625.126.421.921.7
32.728.932.828.027.9
Non-OECDcountries
55.055.150.556.359.8
41.835.336.443.942.6
47.351.258.154.263.7
56.058.361.267.369.6
46.140.641.247.848.1
Mercosurcountries
13.49.5
16.828.130.4
8.14.77.8
13.913.7
38.436.337.639.652.0
30.628.434.741.246.7
10.76.7
11.518.519.5
Note: For countries included in OECD, Europe, and non-OECD, see World Bank (1992: 40). NAFTA includes the United States, Canada, and Mexico.Source: Compiled from United Nations Comtrade records.
Yeats 5
Given that major shifts occurred in the direction of members' trade towardMercosur, what products were most important in this exchange, and how didthe composition of exports change? Table 2 lists the value of Mercosur mem-bers' exports to one another and indicates the shares for several broad productgroups. On average, in 1994 about 63 percent of Mercosur's intratrade con-sisted of manufactures (about 15 percentage points higher than their share in theregion's global exports), with Brazil, as expected due to its relative size, having amajor influence on the overall average. More than 81 percent of Brazil's exportsto Mercosur in 1994 consisted of manufactured goods, almost double the corre-sponding share for Argentina and more than four times that for Paraguay. Table2 also documents the overall importance of the transport and machinery group(Standard International Trade Classification [srrc] 7) in Mercosur's intratrade;these goods comprised almost one-third of total trade in 1994.
From table 2, the second largest product category in intratrade, namely foodsand feeds, by 1994 accounted for about one-quarter of the goods traded withinMercosur (their share in the region's global exports was about 36 percent). Theimportance of this category declined after the early 1980s. Agricultural materi-als and ores, minerals, and nonferrous metals also declined in relative impor-tance. Mineral fuels was the only product group, in addition to manufactures,that increased its relative share. In short, manufactures provided the catalyst forthe increase in Mercosur's intratrade, with transport and machinery productsbeing the most dynamic subsector within this group.
Trade intensity indexes can provide additional insights into the nature and im-portance of secular changes in bilateral trade flows such as those occurring forMercosur. The intensity of trade refers to a tendency for two countries to trade moreor less heavily with each other based on factors such as their global importance inworld exports and imports. The measure has been used since the 1960s in numerousanalyses of the direction and level of international trade. For illustrative examples,see Kojima (1964), Drysdale and Garnaut (1982), and Anderson (1983). Specifi-cally, these indexes can highlight the relative importance of (seemingly minor) changesin trade between countries that have relatively small shares in global trade. If thetrade intensity index takes a value above unity, the countries have greater bilateraltrade than would be expected based on the partner's share in world trade. Whencomputed for a single point in time, the measure is of limited utility because it doesnot incorporate the influence of factors such as distance and languages on trade.However, analysis of changes in these indexes over time can show whether twocountries are experiencing an increased or decreased tendency to trade with eachother. In the case of Mercosur, the magnitude of the change in this index can pro-vide a useful yardstick for assessing the importance of the expansion of intratrade.
The intensity of trade index (7,y) is defined for country fs exports to country jas the share of i's exports going to / (X,y/ X,) relative to the share of ;'s imports
in world imports (Mw). That is,
(1)
Table 2. Product Composition of Mercosur Countries' Intratrade, 1979-81 to 1994
Exporter
Argentina1979-811984-861990-9219931994Brazil1979-811984-861990-9219931994Paraguay
1979-811984-861990-9219931994Uruguay1979-811984-861990-9219931994Mercosur1979-811984-861990-9219931994
All items(millions of
dollars)
1,112.2739.3
2,045.53,684.04,803.2
1,588.11,175.42,564.25,393.75,920.0
116.7105.4295.0287.3424.8
312.2270.8565.6661.3895.7
3,129.22,290.95,482.0
10,026.312,043.6
Food andfeeds
51.348.744.134.336.0
14.413.19.7
10.611.2
36.248.832.823.241.2
49.551.045.039.739.1
31.830.727.421.624.2
Agriculturalmaterials
0.81.81.50.82.6
3.93.31.21.10.9
45.746.156.258.938.8
1.74.43.32.42.0
4.14.94.52.73.0
Percentage of total exportsOres and
metals
1.11.51.20.70.7
5.09.15.53.22.8
0.2n.a.0.20.50.5
1.80.40.90.70.8
3.15.23.12.01.7
Mineralfuels
9.311.89.0
18.416.3
5.94.91.43.13.6
0.3n.a.0.60.60.5
n.a.1.00.10.10.0
6.36.44.18.58.3
Allmanufactures
37.536.244.245.744.3
70.869.582.181.781.3
17.65.1
10.516.919.1
46.441.850.456.857.7
54.652.560.865.062.6
Transport andmachinery'
14.810.516.424.123.6
34.624.238.640.839.6
n.a.n.a.0.31.01.7
9.15.36.9
18.423.9
23.716.425.032.130.7
n.a. Not applicable.a. Subset of all manufactures.Source: Computed from United Nations Comtrade records.
Yeats 7
Brown (1947) was one of the first to use this index. Some analyses have nettedout country j's imports from global imports in the denominator of equation 1 inrecognition of the fact that a country cannot trade with itself. This is not true,however, for a regional block of countries. Even netting out intratrade, given thesmall size of Mercosur in global trade, the adjustment would produce only smallchanges in the index values reported.
Table 3 reports trade intensity ratios that were computed using United Na-tions Series D Comtrade statistics for Mercosur countries' trade with one an-other and with NAFTA members for select periods from the late 1970s to 1994.The index documents the increased intensity of trade between Mercosur mem-bers. For example, in 1994 Argentina's intensity index for trade with Brazil was39.2, which was more than five times its corresponding level in 1979-81. Brazil'sindex for trade with Argentina more than doubled over the same period. Withthe exception of Paraguay, where trade data are of poor quality, the bilateralintensity index ratios for Mercosur intratrade were markedly higher in 1994 thanin any previous period. These results strongly reinforce the impression providedby tables 1 and 2 that exports were reoriented toward regional markets. A keyquestion is whether these changes are consistent with efficiency and the truecomparative advantage of member countries.
In contrast to the pattern for Mercosur, no similar results occurred for tradewith Canada and the United States. With one exception (Brazil's exports to theUnited States), the index for exports to both Canada and the United States werebelow unity. Although Mercosur members' trade with Mexico produced indexvalues above unity, the numbers contained considerable volatility (for example,Argentina's index was 6.0 in 1979-81 and 1.5 in 1994), and lower values weregenerally recorded in 1994 than in the previous periods. The key message is thatMercosur members are typically becoming more dependent on trade with oneanother and less dependent on trade with NAFTA countries.
n. ASSESSING THE EFFECTS OF REGIONAL TRADE ARRANGEMENTS
Analysts often consider the effects of regional trade arrangements by fo-cusing on changes in import shares (see, for example, Sapir 1992 on theEuropean Union). Although useful, this approach fails to address issues ofefficiency in production. This article extends such analyses with several newmeasures based on exports to investigate whether the changes in trade wereconsistent with member countries' current comparative advantage. Did theincreased intra-Mercosur trade take place in sectors where Mercosur coun-tries had evidenced an ability to compete in markets where they were notshielded by discriminatory trade arrangements? One way to address this ques-tion would be to determine whether Mercosur was also able to export thefastest-growing products in intratrade to third countries. In other words, didthe exchange in these goods meet the test of the marketplace? Indexes avail-able for addressing this question include measures of global market perfor-
THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO.
Table 3. Trade Intensity Ratios for Mercosur Countries in Intratradeand for Trade with North America, 1979-81 to 1994
Exporter
Argentina1979-811986-881994Brazil1979-811986-881994Paraguay1979-811986-881994Uruguay1979-811986-881994
Argentina
9.09.9
21.7
41.748.625.2
22.736.044.7
Mercosur country
Brazil
7.414.039.2
11.241.967.2
14.633.143.7
Paraguay
86.840.592.7
80.756.071.5
52.222.236.8
Trading partner
Uruguay
27.549.289.4
19.031.636.7
45.148.827.7
NorthCanada
0.30.20.1
0.60.60.3
0.00.00.0
0.40.20.2
American
Mexico
6.02.81.5
3.21.42.1
3.40.20.4
0.61.72.1
country
United States
0.70.80.7
1.41.71.3
0.50.30.4
0.70.80.4
Note: The trade intensity index (/#) is defined for country fs exports to country / as the share of Tsexports going to /- (X , / X() relative to the share of ps imports (M.) in world imports {MJ). That is, / =(X^l X) I (M(/ M.J. If the trade intensity index takes a value above unity, the countries have greaterbilateral trade than would be expected based on the partner's share in world trade.
Source: Computed from United Nations Comtrade Series D statistics.
mance and trade orientation and measures based on the factor (labor andcapital) intensities of different products.
The regional orientation index (R;) for Mercosur exports of product / is de-fined as
(2) / = [ V X , r ] / [ x o / / X , o ] x l 0 0
where x^ and xO] represent the value of exports of / in Mercosur's intratrade andin trade with third countries, respectively. Similarly, Xfr and Xto reflect the totalvalue of member countries' exports within and outside the arrangement. Theindex value ranges between zero and infinity, with a value of unity indicatingthe same tendency to export the good to members and nonmembers. Increasingvalues above 1 indicate a greater tendency to export to regional markets.
Several specific points should be noted with regard to the properties of thisindex. First, the index conveys only limited information about trade patterns ifcomputed for a single point in time. Various factors, such as comparative ad-vantage, transport costs, or trade barriers in alternative markets, determine thegeographic orientation of trade. However, intertemporal comparisons of thisindex over relatively short periods can provide useful information about changesin the geographic pattern of trade. Second, in the short to medium term, changesin comparative advantage, transport costs, or relative tastes should be minimal,
Yeats 9
so factors such as differential changes in trade barriers (such as those that ac-companied the formation of Mercosur) would influence changes in the indexvalue more heavily. Third, examined in isolation, the percentage changes in ex-ports of different goods within a regional arrangement do not indicate the changesin demand for products in third markets. For example, products with the high-est growth rates within Mercosur could move away from the region if exports tothird markets were growing even faster. The regional orientation index does notsuffer from this defect.
In addition to the regional orientation measure, a second index reflects re-vealed comparative advantage (RCA) and can be computed for each country inthe arrangement and for each product traded. This measure (C;) is defined as
(3) C; = [xo//XJ/[x^/X*]
where x -̂ and X * represent world exports of product / and total world exportsexclusive of the regional trade between member countries, respectively. The in-dex value ranges between zero and infinity; values above unity indicate that thecountry has a revealed comparative advantage in the product. The index ex-cludes regional trade in order to reflect more accurately the capacity of Mercosurmembers to compete evenly in markets where discriminatory trade arrangementsdo not provide an unnatural edge.
Analysts generally compute RCA indexes only for processed goods or manu-factures because trade in agricultural products is distorted by export incentivesand trade barriers that are likely to obscure whether a country has a real com-parative advantage or disadvantage in these products. The present analysis doesnot attempt to derive revealed comparative advantage indexes for agriculturalproducts and other primary commodities. As such, it is based on 128 three-digitsrrc products that include all manufactured goods as well as a number of pro-cessed foodstuffs and processed raw materials. However, the composition ofBrazilian (and therefore Mercosur's) manufactures exports may still be distortedby this country's long history of providing export subsidies.
Direct comparisons of the regional orientation and RCA indexes suggest theextent to which Mercosur distorted exports from the patterns consistent withcomparative advantage. Although the two indexes do not measure import diver-sion directly, they provide closely related information that can be used to inferwhether the additional trade generated by Mercosur was primarily in productsin which Mercosur countries had low enough costs to be competitive in thirdmarkets. If the Mercosur countries were not competitive in those products, thenthe additional trade within Mercosur could have been replaced by moreefficient outside suppliers. The issue is essentially whether regional trade ar-rangements foster high-cost imports at the expense of low-cost ones. Traditionalcalculations analyze the displacement of imports from nonpartners by those frompartners, implicitly comparing partner and nonpartner costs by their relativecompetitiveness in the regional market before the regional trade arrangement.The supplementary view developed here makes inferences about high and low
10 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1
costs by implicitly comparing the relative competitiveness of partner andnonpartner goods in world markets.
This study tests the use of these indexes in this context using actual tradedata. Additional data provide useful supplementary information concerningchanges in the composition and direction of trade that accompanied the forma-tion of Mercosur. Table 4 lists the 30 three-digit SITC processed products thatmet two separate criteria. First, they recorded at least $250,000 in intratrade in1988 (this lower limit was set to prevent the tests from being biased by marginalproducts, while 1988 was selected as a period prior to the implementation—and likely the anticipation—of major preferences). Second, they registered thehighest 1988-94 compound annual growth rates in trade among Mercosurmembers.
Table 4 provides the values for the regional orientation index and the relativefactor intensity in production for the 30 product groups. The regional orienta-tion index for 1988 and the rate of change in the index over 1988-94 indicatethe extent to which a reorientation of trade toward the region contributed toeach product's dynamism. The factor intensity index is drawn from World Bank(1992) and takes a value of 100 for products whose labor intensity is averagerelative to that of all manufacturing activity. Increasing values above this levelidentify goods that are more capital-intensive in production (conversely, decreas-ing values below 100 identify products that are more labor-intensive).
The factor intensity for industry/ (L;) is defined as
(4) L;.= [ (V, /N,) / (V ( /N,) ]xl00
where V; and V, represent value added in industry / and in all manufacturing inthe United States, respectively, while N; and N, represent the number of workersin the industry and in all manufacturing activity, respectively. Studies by theNational Bureau of Economic Research show that products manufactured bylabor-intensive processes in the United States are also manufactured by rela-tively labor-intensive processes in other countries, although the levels of use maydiffer (Lary 1968). On this basis, Lary justifies computing the index with datafrom the U.S. Census of Manufactures. There is an inverse relation between thenumeric value of the index and the labor intensity of a given product. That is,the lower the numeric value, the higher the labor intensity. See Yeats (1989) fordetails concerning computation of the index and the results reported in table 4.
Much of the dynamism in the intratrade of the goods in table 4 was associ-ated with a shift in the regional orientation of exports toward Mercosur. Forexample, in 1988 the trade-weighted share of these products within Mercosurwas approximately 49 percent higher than that for other destinations, as re-flected in a value of 1.49 for the regional orientation index. By 1994 this indexvalue rose more than twofold to 4.55. Road motor vehicles (srrc 732) played amajor role in this overall shift, as intra-Mercosur trade in these goods increasedby a factor of more than 10, in value terms from $207 million in 1988 to morethan $2.1 billion in 1994. Of these 30 dynamic products, 24 recorded a shift in
Yeats 11
the regional orientation index toward Mercosur, and the indexes of half of the30 products more than doubled.
High tariffs and nontariff measures may have constrained exports to thirdmarkets, particularly for agricultural products. In these cases, values for theregional orientation index could have risen because of restrictions in third mar-kets and not because of the more favorable tariff treatment of member countriesin interblock trade. There is reason to believe, however, that this situation oc-curs infrequently. Records of the World Bank and United Nations Conferenceon Trade and Development (UNCTAD) show that most of the products listed intable 4 do not encounter major OECD restrictions (with the exception of pro-cessed foodstuffs). In addition, Mercosur provides sizable trade preferences onintratrade. It is also possible that idiosyncrasies in demand patterns and in theability to produce certain varieties of goods made trade between Mercosur coun-tries increase disproportionately fast as a result of the most-favored-nation lib-eralization. This is sufficiently unlikely, however; the burden of proof must liewith advocates of this view.
Although the results are somewhat mixed, another important point is that thedynamic products generally consist of goods that are relatively capital-intensivein fabrication. Overall, the 30 items listed in table 4 had a factor intensity indexratio of 118, which indicates that they were 18 percent more capital-intensivethan average for all manufacturing activity. In contrast, Yeats (1989) employsthese same data and determines that the recent capital intensity of exports forHong Kong, the Republic of Korea, and Taiwan (China) were 20 to 25 percentbelow average, while Singapore's ratio was about 2 percent higher than average.The high capital intensity of Mercosur's exports is troubling because it raises thequestion of how capital-intensive goods from one developing country to anothercan compete with similar exports from industrial countries in the absence ofdiscriminatory trade measures.
Comparative advantage explanations of the composition of trade betweenindustrial and developing countries generally focus on factor proportions. Thatis, countries with a relative abundance of low-cost labor should export labor-intensive products to countries where capital is relatively abundant. Empiricaltests by Lary (1968), Tuong and Yeats (1980), and Yeats (1989) confirm theaccuracy of factor proportions as a predictor of trade flows. Theory is less con-clusive in explaining the composition of trade between developing countries.However, although countries may import capital-intensive goods from indus-trial countries and labor-intensive goods from developing countries, nearly allmodels suggest that exports will be concentrated in one part of the factor inten-sity spectrum. Donges (1987) concludes that discriminatory trade arrangementsamong developing countries foster this exchange. Havrylyshyn (1987) andHavrylyshyn and Wolf (1987) also indicate that domestic and trade policy dis-tortions promote these exports.
Table 5 provides a different perspective on the shifts in Mercosur's intratradeand the efficiency implications of these changes. The table presents the 30 prod-
Table 4. Dynamic Products in the Intratrade of Mercosur Countries, 1988-94
Commodity'
Nonalcoholic beverages (111)Tobacco manufactures (122)Articles of plastic (893)Alcoholic beverages (112)Perfumes and cosmetics (553)
Furniture (821)Iron and steel castings (679)Nonelectric power machinery (711)Nonmotor road vehicles (733)Wood manufactures (632)
Machines for special industries (718)Structures and parts (691)Prepared meat (011-013)Motor road vehicles (732)Plywood and veneers (631)
Lace and ribbons (654)Special textile products (655)Prepared sugar (061-062)Prepared dairy (022-024)
Exports to(thousands
1988
3492,0324,2254,1374,766
3,972287
25,1403,1181,472
10,7631,783
21,934206,996
3,707
1,3864,945
11,45623,495
Mercosurof dollars)
1994
26,238112,68195,53581,67186,282
66,2133,696
290,68735,85416,689
120,61719,834
237,9122,112,750
35,630
13,15746,919
102,655204,019
Regional orientation index*1
1988
2.350.95
12.451.875.22
1.150.300.402.230.43
0.930.720.171.250.20
3.560.880.304.31
Percentage pointchange, 1988-94
46.120.91
-7.524.618.16
-0.100.410.794.65
-0.10
0.041.050.233.170.16
2.290.590.07
18.17
Factorintensityindex*
162210
86182160
60145105
9080
11310510212257
6869
140180
Trade growthrate, 1988-94
1.050.950.680.640.62
0.600.530.500.500.50
0.500.490.490.470.46
0.460.460.440.43
Metal manufactures, notspecified elsewhere (698) 5,984 51,430 0.90 0.87 84 0.43
Electric power machinery (722)Materials of rubber (621)Glassware (665)Nails, nuts, and bolts (694)Preserved fruit (053)
Domestic electrical equipment (725)Base metal household equipment (697)Nonfur clothing (841)Metal tanks and boxes (692)Copper (682)
Total
14,2783,6365,3813,0214,486
12,5685,59219,3423,9603,001
121,71730,78045,01724,78236,053
97,32240,452138,80528,09921,161
1.183.132.212.860.05
2.192.720.632.970.54
-0.333.132.880.810.08
3.76-0.840.71
-0.090.05
8810010788116
92796482120
0.430.430.420.420.41
0.410.390.390.390.38
417,212 4,344,657 1.49 3.06 118 0.48
Note: Mercosur countries are Argentina, Brazil, Paraguay, and Uruguay.a. Numbers in parentheses are the SITC codes.b. The regional orientation index (R^ for Mercosur exports of product/ is defined as R̂ = [(x^l Xlr) I (x^l Xlo)\ x 100, where xn and xo/ represent the value of
exports of/ in Mercosur's intratrade and to third countries, respectively. Similarly, Xlr and XK reflect the total value of member countries' exports within andoutside the arrangement. An index value above unity indicates a greater tendency to export the good to regional markets.
c. The factor intensity index for industry / (L) is defined as L = [(V / N^ / (Vt I N,)] x 100, where V and V, represent value added in industry / and in allmanufacturing in the United States, respectively, while N and N, represent the number of workers in the industry and in all manufacturing activity, respectively.The higher the index, the higher the capital intensity of the production process. Industries with an index value of 100 would have a labor/capital intensity that isaverage for all manufacturing activity. For information on how the index is derived, see Lary (1968) or World Bank (1992).
Source: Derived from United Nations Comtrade statistics.
Table 5. Mercosur Exports with the Largest Change in Regional Orientation toward Mercosur Markets, 1988-94Revealed
Exports comparativeadvantage
Commodity 1988
349642
23,4954
4,766
6518
23,40415,7633,118
4,13739,60812,568
206,9963,636
5,38113,38122,5831,386
1994
26,238219
204,019954
86,282
35,051721
48,74572,24935,854
81,671121,29497,322
2,112,75030,780
45,01721,170148,07913,157
1988 1994 Change, 1988-94 index*, 1994
Nonalcoholic beverages (111)Lead (685)Prepared dairy (022-024)Nonwheat meal or flour (047)Perfumes and cosmetics (553)
Wheat meal or flour (046)Cork manufactures (633)Preserved vegetables (055)Articles of paper (642)Nonmotor road vehicles (733)
Alcoholic beverages (112)Agricultural machinery (712)Domestic electrical equipment (725)Road motor vehicles (732)Materials of rubber (621)
Glassware (665)Synthetic fibers (266)Rice, glazed or polished (042.2)Lace and ribbons (654)Food preparations not
specified elsewhere (099)
2.353.034.310.055.22
0.221.18
17.662.162.23
1.872.082.191.253.13
2.216.289.283.56
48.4725.4222.4917.2613.37
5.676.30
22.617.106.88
6.485.885.944.426.26
5.099.14
11.655.86
7,727 45,412 2.10 4.35
46.1222.3918.1717.218.16
5.445.134.954.934.65
4.613.813.763.173.13
2.882.872.372.29
2.25
0.050.000.130.040.14
1.080.050.130.200.13
0.190.450.230.450.32
0.380.111.030.22
0.28
Structures and parts (691)Tobacco manufactures (122)Textile yarn and thread (651)Metal manufactures not
specified elsewhere (698)
Nails, nuts, and bolts (694)Nonelectric power machinery (711)Nonfur clothing (841)Plumbing and lighting equipment (812)Electrical distributing machinery (723)Glass (664)
Total
1,7832,032
26,523
5,984
3,02125,14019,3423,8196,8214,851
488,345
19,834112,681118,120
51,430
24,782290,687138,80514,36335,77525,079
4,058,540
0.720.950.85
0.90
2.860.400.632.231.551.27
2.83
1.771.861.73
1.77
3.661.201.342.932.221.93
5.97
1.050.910.88
0.87
0.810.790.710.700.670.65
3.14
0.390.390.90
0.33
0.280.450.270.130.260.36
0.31
a. Numbers in parentheses are the SITC codes. Mercosur countries are Argentina, Brazil, Paraguay, and Uruguay.b. The regional orientation index (R̂ ) for Mercosur exports of product / is defined as R̂ = [(x^ I Xn) I (x^ I Xlo)] x 100, where x^ and x . represent the value
of exports of/ in Mercosur's intratrade and to third countries, respectively. Similarly, Xa and Xto reflect the total value of member countries exports within andoutside the arrangement. An index value above unity indicates a greater tendency to export the good to regional markets.
c. The revealed comparative advantage index (C() is defined as Cy = [(xoj/ Xw) / {x* / X*w)] x 100, where x* and X^ represent world exports of product/andtotal world exports exclusive of the intratrade of the regional trade arrangement member countries, respectively. Values above unity indicate that the region hasa revealed comparative advantage in the product.
Source: Computed from United Nations Comtrade records.
16 THE WORLD BANK ECONOMIC REVIEW, VOL 12, NO. 1
uct groups that experienced the greatest reorientation of trade toward the region(as measured by the regional orientation index) over 1988-94. In addition, itshows the modified 1994 RCA index (based only on trade performance in thirdmarkets) for each item. The two measures can be compared to determine whetherthe goods that assumed steadily increased importance in intratrade were amongthose that Mercosur was able to export competitively to third countries. In otherwords, the comparison shows whether Mercosur countries showed any evidenceof export strength in these goods in independent markets where they were notprotected by discriminatory trade arrangements.1
The results reflected in table 5 are discomforting. For the 30 groups with thelargest regional shift, only two (SITC 046—wheat meal or flour—and SITC 042.2—glazed rice) had RCA indexes slightly above unity, while the index averaged only0.27 for the other items. These results strongly suggest that Mercosur membersexperienced a strong comparative disadvantage for these goods in markets thatdid not incorporate discriminatory trade measures against outsiders. The re-vealed comparative advantage index averaged only 0.07 for the top five prod-ucts listed in the table.
Mercosur countries do receive OECD preferences for some of the products intable 5 under the Generalized System of Preference (GSP) schemes that wereadopted in the early 1970s. These GSP preferences have since been eroded bytariff cuts in the multilateral trade negotiations and now average about 1 to 2percentage points for products that are eligible for such treatment. In contrast,section III shows that the preferences that Mercosur countries extend to oneanother are far higher than the GSP margins that developing countries have ar-gued are vital to their ability to compete in international markets. The state-ments that developing countries have made on the GSP strongly suggest that dis-criminatory tariffs set at Mercosur's levels have the potential to displace asignificant amount of exports from third countries.
Analysis of the underlying 1988-94 changes in Mercosur's RCA indexes forthe products in table 5 reveals another disturbing trend. The average index valueactually declined from 0.42 to 0.31 over the six-year period. Furthermore, thereductions were widely distributed within the group, with 21 of the 30 (70 per-cent) items recording lower RCA values in 1994 than in the earlier period. Inshort, the evidence suggests that Mercosur became less, rather than more, inter-nationally competitive in products where trade was reorienting most rapidlytoward the region.
What factors are responsible for this surprising reorientation of trade? Evi-dence suggests that Mercosur's own trade barriers were the cause. The analysisin section III shows that goods, such as those listed in table 5, generally are
1. The regional orientation and RCA indexes both depend on the shares of each good in Mercosur'stotal exports. To the extent that these are measured with error, the two will be negatively correlated.There is no reason to be particularly worried by this, however, because trade shares are fairly robust atthis level. Besides, nearly all our analysis relates changes in regional orientation to the starting level ofrevealed comparative advantage.
Yeats 17
protected by higher-than-average discriminatory trade measures. Local produc-ers would have a strong incentive to seek the higher prices available on sales toMercosur markets. Given the option of selling locally at higher prices, producerswould have a strong incentive to divert exports from more competitive foreignmarkets to less competitive regional markets. As a result, RCA indexes woulddecline for the products that are growing fastest in intratrade.
Figure 1 provides a graphical view of the major changes that were occurringwithin the product composition of Mercosur's intratrade. The upper half of thefigure shows aggregate RCA indexes for the 15 product groups (defined here atthe two-digit SITC level) that accounted for almost all (92 percent) of the 1988-94 change in Mercosur's intratrade. The width of each product's bar is propor-
Figure 1. Regional Orientation and Revealed Comparative Advantage Indexesfor Mercosur's Intratrade, 1994
Index100
0.75
Revealed comparative advantage
050
0 25
II o gZ 5
I I"
Product group
Regional orientation
2.00
1.00
Produa group
Note-. The products in the figure account for 92 percent of the change in Mercosur's intratrade in1988-94. The width of each bar is proportional to the share of the produa in the 1988-94 increase inMercosur's intratrade. Products are defined at the two-digit level of the srrc Revision 1. See text definitionsof the indexes.
Source. Author's calculations.
Table 6. Mercosur's Regional Orientation Index and Revealed Comparative Advantage Index by Product Decile, 1988-94
Product dealer
FirstSecondThirdFourthFifthSixthSeventhEighthNinthTenth
Total
Mercosur intratrade(thousands
1988
127,939325,573212,759302,175108,996167,733287,832222,842373,557226,930
2,356,437
of dollars)1994
810,6193,033,8991,027,9641,303,419
597,859840,060595,436469,499516,184514,461
9,709,400
Regionalorientation
index11
1988
3.841.631.391.50l . l l1.331.151.733.48
31.82
1994
13.474.261.861.671.161.120.780.961.33
10.17
Change inregional
orientation index,1988-94
9.632.640.470.170.04
-0.21-0.37-0.77-2.14
-21.65
Revealedcomparative
advantage index?1988
0.430.640.880.962.152.653.042.050.860.24
1994
0.240.480.540.992.143.683.602.602.061.99
Percentage of industrieswith a revealed comparative
advantage index greaterthan unity, 1994
7.67.6
15.446.138.538.569.246.146.123.1
a. Product deciles are ranges that include 10 percent of all observations after they have been ranked in either ascending or descending order. The deciles arebased on 128 processed product groups.
b. The regional orientation index (Rf) for Mercosur exports of product / is defined as R( = [(xn I Xn) I {x^ I Xa)] x 100, where xn and x , represent the valueof exports of / in Mercosur's intratrade and to third countries, respectively. Similarly, X^ and X^ reflect the total value of member countries exports within andoutside the arrangement. An index value above unity indicates a greater tendency to export the good to regional markets.
c. The revealed comparative advantage index (C) is defined as C, = [(x^ IXK) I (x ̂ / X *J] x 100, where * ̂ and X*m represent world exports of product / andtotal world exports exclusive of the intratrade of the regional trade agreement member countries, respectively. Values above unity indicate that the region has arevealed comparative advantage in the product.
Source: Computed from United Nations Comtrade records.
Yeats 19
tional to its share of the total increase. Three groups—transport equipment,nonelectrical machinery, and electrical machinery—accounted for more than halfof the total 1988-94 increase in Mercosur's intratrade, even though the RCAindexes for these products were very low (in the 0.25 to 0.40 range). To helpinterpret these data, the lower half of the figure plots the matched regional ori-entation index for each group. For these 15 product groups, a consistent patternof (very) low RCAs and high regional orientation is generally observed. In onlyone product group (iron and steel), which accounted for only about 3 percent ofthe increase in intratrade, did Mercosur achieve a revealed comparative advan-tage index above unity. In short, figure 1 provides little evidence that Mercosur'sintratrade was evolving along lines consistent with current comparative advan-tage. Rather the products recording the largest shift toward the region werethose for which Mercosur had not demonstrated an ability to export competi-tively elsewhere.
While the discussion of table 5 focuses on extreme (positive) changes in theregional orientation index, table 6 provides a composite view of the completeprofile of intratrade changes occurring within Mercosur. Table 6 presents theregional orientation indexes for 1988 and 1994 for the 128 processed products,ranked in descending order based on changes in this index and grouped by decile.The table shows the average RCA and regional orientation indexes by decile andcompares the 1988-94 change in the regional orientation index with Mercosur'saverage RCA indexes.
The results presented in table 6 reveal a pattern that differs from that ex-pected on the basis of the comparative advantage measure. For the first decileproducts, those that registered the largest shift toward the region (an averageregional orientation index increase of 9.63), the average 1994 Mercosur RCAindex was only 0.24. Similarly, for the second decile products, the regional ori-entation index change took a value of 2.64, in spite of the fact that the averageRCA index for these goods was under 0.50, and actually declined from its earlier1988 level. The average RCA index declined between 1988 and 1994 for the topthree decile product groups, indicating that Mercosur became less, not more,internationally competitive for goods experiencing the greatest shift towardintratrade. Because the goods in these three deciles enjoy well-above-averagelevels of protection against third countries (see section HI), domestic producerswould have a strong incentive to divert trade to local markets (causing the RCAindexes to decline) in order to profit from the higher prices.
Mercosur's regional orientation indexes showed a fairly consistent tendencyto move counter to the revealed comparative advantage measure over the decileranges. For example, in the sixth through tenth decile products, where the 1994RCA index ranged between 1.99 and 3.68, exports to third countries grew farfaster than those to the region. The fairly high index values in the fifth throughtenth deciles were in part due to the fact that the distribution of index values isright-skewed. That is, the index is bound by zero but can range (in theory) toinfinity. One or two products in a decile group with high RCA index values may
20 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1
have influenced the results for these decile groups. The key point that followsfrom this complete profile of trade changes is that the regional orientation ofexports is growing most rapidly for products where there is little evidence thatMercosur has a current comparative advantage.
m. MERCOSUR'S TRADE BARRIERS AND RECENT TRADE CHANGES
What caused the observed changes in the pattern of trade to diverge so widelyfrom the pattern expected on the basis of efficiency conditions and current com-parative advantage? It seems highly unlikely that they were due to changes innatural factors such as freight costs. Transport costs can be reduced by adoptingnew shipping technologies or by making major improvements in port and han-dling facilities, but these are unlikely to occur in a relatively short time periodsuch as that covered by this study.
The discriminatory nature of Mercosur's own trade policies might explainthe changes in the pattern of trade. The Mercosur countries had been liberaliz-ing imports on a most-favored-nation basis for several years when, in 1991, theyintroduced a widespread set of preferential tariff cuts. United Nations Comtraderecords indicate that in 1991 intrablock trade accelerated sharply. If preferenceswere highest for the most dynamic products in Mercosur's intratrade (productsthat were shifting most rapidly toward the region), this would suggest thatMercosur's trade barriers affected the reorientation of exports. Evidence relat-ing to this point could come from an analysis of the margins of preference thatMercosur's trade barriers provide to member countries. Are these marginshigh enough to account for the increases in intratrade that occurred during the1991-94 period, when tariff preferences on all but a few products were beingimplemented?
Several sources of statistics on Mercosur's tariffs and nontariff barriers areavailable for analyses of these points. A cooperative project between UNCTADand the World Bank, named SMART—Software for Market Analysis and Re-strictions on Trade—compiled statistics on many OECD and developing coun-tries' pre-Uruguay Round trade barriers (see UNCTAD and World Bank 1989for a description of the SMART database and operating system). Because therecords include both Brazil's and Uruguay's 1988-89 tariffs (along with dataon Brazil's nontariff measures), they provide partial details on Mercosur's tradebarriers at very fine levels of detail. These two countries account for more than60 percent of Mercosur's total imports. Thus the SMART records provide auseful profile of the structure of external protection. However, the Mercosurcountries (particularly Brazil) subsequently implemented major unilateral re-ductions in most-favored-nation tariffs, making the earlier statistics an unreli-able guide to current levels of protection. For this reason, the analysis usespost-Uruguay Round tariff data directly from the World Trade Organization'sIntegrated Data Base (iDB). Known exceptions and departures from the re-ported World Trade Organization (WTO) statistics (for example, tariffs and
Yeats 21
nontariff restrictions on automobiles) were incorporated into the data. Thesestatistics, like those in SMART, are recorded at the level of the national tariffline, so the two sources of information are comparable. The SMART and IDBrecords, together, afford reasonable insight into changes in the pattern of pro-tection in the early 1990s.
As far as intrablock preferences are concerned, Article 5 of the Treaty ofAsuncion, which created Mercosur, required the implementation of progressive,linear, and automatic tariff reductions starting in 1991 with a view to arriving atzero tariffs for the entire tariff area by 31 December 1994. Although there wassome slippage in this objective, the World Trade Organization (1996: 39) re-ports "that by the end of 1994 intraregional trade between Brazil and its Mercosurpartners has been duty-free since 1 January 1995 except for 29 tariff line items"(out of 9,107).2 The same report quotes Brazilian authorities as stating thatduty-free trade covered close to 95 percent of intraregional (Mercosur) trade in1994. These observations indicate a high correlation between the reported ex-ternal tariffs (tariffs facing countries that are not members of Mercosur) and thedegree of preferences offered on intra-Mercosur trade. Moreover, if in fact thebulk of the preferences was not implemented until late 1994, the trade reorien-tation would have arisen from partial preferences; full implementation of thepreferences in 1995 and 1996 would have had an even larger impact. This analysiscomputes the average levels of current "applied" tariffs facing non-Mercosurcountries and takes them as a measure of intrablock preferences.
The analysis also attempts to identify discriminatory trade barriers by usingtwo measures of the potential importance of nontariff barriers (NTBs). The first,an NTB trade coverage ratio, shows the share of all imports (measured in currentvalues) subject to NTBs. The second, often referred to as a frequency index, showsthe share of all tariff line products covered by one or more nontariff restrictions.Although these measures have some limitations (see Laird and Yeats 1990 for adiscussion), they show the extent to which nontariff restrictions reinforce theeffects of the block preferences. The analysis uses data from 1988, and NTBshave been subject to significant liberalization since then. As such, the NTB dataare most useful for indicating the extent of distortions that were in place in the1980s but probably are less reliable in the present context. However, again ap-pealing to the normal persistence in patterns of protection and noting that theTreaty of Asuncion provides for the removal of NTBs on intrablock trade,the data very likely identify the elements of discrimination. Given the tariffdata, however, the thesis that discrimination exists does not depend on theseNTB measures.
2. Behar (1995) reports that the first preferential reduction in Mercosur's tariffs took place in June1991. A 1994 background study for a World Bank country economic memorandum gave the schedulefor reducing tariffs on intratrade. This schedule set a minimum margin of preference of 47 percent andaugmented the margins of preference that already exceeded this minimum (due to previous arrangements)by an additional 7 percent. A 7 percent cut every six months would follow until the zero tariff objectivewas fulfilled. As noted, in the case of Brazil, this objective was achieved for all but 29 tariff line items.
Table 7. Tariffs and Nontariff Barriers on Mercosur's Imports by Product Decile, 1988-94
Productdecile"
FirstSecondThirdFourthFifthSixthSeventhEighthNinthTenth
Change in Mercosurintratrade, 1988-94
(thousands of dollars)
682,6802,708,326
815,2051,001,244
488,863672,327307,604246,657142,627287,531
Average externaltariff (percent)
1988
54.446.956.146.046.043.638.439.138.440.7
1996b
18.116.717.59.6
10.316.710.911.79.0
10.9
Nontariff barrier
Frequencyindex0
41.924.5f
42.117.720.417.118.527.1
4.08.2
ratio, 1988Trade coverage
index6
83.536.6f
51.828.7
8.34.3
27.531.9
5.428.2
Changes inthe regional
orientation index,1988-94'
9.632.630.470.170.05
-0.21-0.37-0.77-2.15
-21.65
a. The 1996 tariff statistics are drawn from the WTO's Integrated Data Base and are the average duties actually applied by Argentina, Brazil, and Uruguay toimports from non-Mercosur sources. They are based on the lower of the following two rates: the legally bound tariff or the current most-favored-nation appliedrate. A description of the methodology used in computing these averages can be found in Finger, Ingco, and Reincke (1996).
b. See table 6. The deciles are based on 128 processed product groups.c. The frequency index (F) for importing country / shows the percentage of tariff lines covered by some preselected group of nontariff measures and is defined
by Fy = (ZDNi + N() x 100, where N; is tariff line item i, D; is a dummy variable that takes a value of unity if one or more NTBS is applied to the item and zerootherwise, and N, is the total number of lines in the product group. The summation is made over all countries exporting to importing country /'.
d. The trade coverage index (C.) is defined as C = [(ED^,.^ x V ^ ) /XVl(_J x 100, where Vll_m is the value of imports in tariff line item i in year t-n, and Dn
is a dummy that takes a value of unity if an NTB is applied to the item and zero otherwise. If n and m are zero, the index is based on current trade values; otherwisebase year weights are used.
e. The regional orientation index (R^ for Mercosur exports of product / is defined as R( = [{x^ I XJ I (x^ I Xro)] x 100, where xn and x^ represent the valueof exports of / in Mercosur's intratrade and to third countries, respectively. Similarly, X^ and Xu reflect the total value of member countries exports within andoutside the arrangement.
f. Includes Brazil's recent restrictions on automobile imports and domestic automobile assembly regulations.Source: Computed from SMART and the World Trade Organization's Integrated Data Base.
Yeats 23
The frequency index (F;-) for importing country / shows the percentage oftariff lines covered by some preselected group of nontariff measures. Similarly,the trade coverage index (C7) is defined as
(5) C, = [(ZD,,_ x V ^ ) / IV,.^] x 100
where V, ,_„ is the value of imports in tariff line item / in year t-n and Dit is adummy that takes a value of unity if an NTB is applied to the item and zerootherwise. If n and m are zero, the index is based on current trade values; other-wise base year weights are used.
The UNCTAD records contain information about the following types of nontariffrestrictions that are included in the frequency and coverage ratio tabulations:tariff quotas, antidumping duties, restrictive import authorizations, total pro-hibitions, suspended import authorization licenses, antidumping investigations,state monopolies, differential health and safety regulations, and differentialprohibitions based on noncommercial considerations. The records may under-state the current importance of some restrictions like antidumping actions be-cause they do not incorporate data on the surge in new cases that occurred in1992-93.
Table 7 uses the product deciles from table 6 to summarize several statisticsrelating to NTBs. The data strongly suggest that tariff preferences, and the pro-tection they provide for intratrade, were a major factor behind the recent pat-tern of trade changes. For example in 1996, Mercosur tariffs on the mostdynamic products—the first decile products from table 6—averaged 18 percent,about 5 percentage points higher than the average duty on all goods in the 10decile groups. Items in the second and third decile groups had average discrimi-natory tariffs of about 17 percent. Those in the fourth through tenth decile groupstypically declined to about 10 to 12 percent. These numbers exceed by far theaverage tariff margin provided by the GSP (about 1 to 2 percentage points). Manydeveloping countries strongly sought to preserve the GSP tariff margins in theUruguay Round negotiations on the basis that they strongly enhanced the com-petitive position of their exports. The Mercosur tariffs also exceed the averagemargin within EFTA and the European Union (where the average is below 3 per-centage points for industrial goods). Moreover, even including agricultural goodsin the Mercosur common external tariff for the year 2000, the average marginof preference would be about 10 percentage points.
In 1995 the average external tariff for the second decile products in table 7would have been about 22 percent, because the Brazilian tariff on autos wasraised to 70 percent on some imports. Recent actions within the World TradeOrganization accent the importance that member countries attach to the dis-criminatory trade barriers against third countries in this sector. For example, arecent article in the Journal of Commerce (Zarocostas 1996) quotes a WTO re-port that the auto industry is the most highly assisted manufacturing activity inthe country, with effective protection estimated at more than 250 percent. Thearticle also notes that a strict tariff quota had been set on auto imports and that
24 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1
the United States, Japan, the European Union, and the Republic of Korea had allfiled complaints with the WTO alleging discrimination in Brazil's auto trade re-gime. The fact that these new protectionist measures had to be introduced, inspite of the major expansion of domestic production, suggests that any scaleeconomies accompanying the regional arrangement are proving very elusive.
Table 7 shows that NTBs were initially structured along lines that reinforcedthe trade-distorting effects of the agreement's preferential tariffs. According tothe UNCTAD data, nontariff restrictions were applied to about 21 percent of alltariff line items, which is almost half the corresponding ratio (41.9 percent) forMercosur's first decile products in 1988. Similarly, the trade coverage ratio forproducts falling in the first three deciles averaged almost 60 percent (about threetimes the ratio for all imports) and reached 84 percent for the first decile group.
IV. POLICY IMPLICATIONS
This article identified dramatic changes in the Mercosur countries' trade pat-terns over the period 1988-94, particularly the last few years. It also argued thatthese changes were substantially due to the changes in trade policy and probablymainly those introduced under Mercosur transitional arrangements. Statementsof this kind depend on comparing actual data with a counterfactual. This articlepresented the implicit counterfactual that, but for these policy developments,Mercosur's trade patterns would not have changed much and the shift towardapparently uncompetitive capital-intensive intrablock trade would not have oc-curred. Thus, if the Mercosur countries had achieved an equivalent degree ofliberalization on a nondiscriminatory basis, they would have maintained a moreefficient import structure, paying less or obtaining better goods, and they wouldhave purchased more from their trading partners outside the block. The analysiscompared trade patterns in 1994 with those in 1988 (not with some free-tradecounterfactual), assuming that they were no more distorted in 1994 than in1988. In fact, it is likely that trade in 1994 was less distorted geographicallybecause, in the earlier period, trade barriers were applied on a most-favored-nation basis with the exception of a few sectoral arrangements.
In the relatively short-run period covered by the analysis, it is unlikely thatcomparative advantage changed significantly (the RCA analysis supports thispoint). It seems likely that a most-favored-nation liberalization would not haveresulted in major changes in the share of imports. Given the size of the tradeeffects identified, the analysis finds compelling evidence that preferences and theapplication of industrial policies within regional trade arrangements can bedistortionary. There may be other explanations for the changes in trade pattern,but none seems nearly so direct, or so likely, as the role of trade policies anddiscriminatory trade barriers.
A separate, albeit related, question based on a second counterfactual is whetherMercosur countries' trade was more distorted in 1994 than in 1988. Unfortu-nately, analyses of trade data alone cannot answer this question completely.
Yeats 25
Although the trade pattern is more distorted, it is possible that the efficiency ofthe tradeoffs between domestic and foreign goods in general (roughly speaking,the level of trade) increased sufficiently to offset this. Comparing 1994 with1988, the Mercosur trade arrangements most likely both created and divertedtrade. Even trade-diverting customs unions can improve economic welfare ifthey lead to declines in producer and consumer prices. Thus, while Mercosurtrade policies are distortionary relative to what could have been achieved, theymay well have been positive relative to the starting point for member countries.
This discussion raises an important semantic point: what is Mercosur? Broadlyspeaking, the sample period for most of the analysis (1988-94) witnessed twoclasses of policy change: the general liberalization of trade barriers facing allpartners, which was stronger over 1988-91 but not restricted to that period,and the preferential intrablock liberalizations, which occurred mainly after theTreaty of Asuncion in 1991. Lack of data on the precise path and structure oftariffs make it possible to consider only the combined effects of these two liber-alizations, loosely referred to as "the effects of Mercosur" rather than "the ef-fects of the trade policies of the Mercosur countries." Thus the estimate ofMercosur effects includes, strictly speaking incorrectly, both the effects of thegeneral trade barrier liberalizations over 1988-91 (and any continuing tariffreductions after 1991) that produced an impressive surge in global imports andthe effects of the Argentinean-Brazilian bilateral sectoral liberalizations over1988-91. Including the effects of the general trade barrier liberalizations leadsto an understatement of the discriminatory effects of Mercosur proper; includ-ing the effects of the bilateral liberalizations leads to an overstatement. It shouldalso be noted that the restrictive auto regime is strictly a national rather than aMercosur tariff regime. Some commentators on this article have argued thatMercosur's effect has been to constrain the restrictiveness of this regime.
The alternative approach of limiting the analysis of trade changes to the pe-riod since the Treaty of Asuncion was not pursued here precisely because it wasunclear how much discrimination was built into 1991 and how much generalliberalization after 1991 was strictly due to the Mercosur agreement. Indeed,given that Mercosur has so little institutional structure outside its member gov-ernments, it did not even seem meaningful to try to disaggregate the changes intrade policy into Mercosur and national components. An example of a nationalcomponent would be Brazil's recent unilateral increase in tariffs on automotiveproducts and the imposition of quotas on these goods.
The findings of this study appear to constitute convincing evidence that re-gional preferences can affect trading patterns strongly and detrimentally for bothmember and nonmember countries. The changing trade patterns suggest thatMercosur was not internationally competitive in sectors where intratrade grewmost rapidly. Domestic producers reoriented exports to local markets, presum-ably in order to charge the higher prices associated with the most restrictivetrade barriers. This reduced the potential exports of third countries to Mercosurand under many circumstances may have reduced their welfare relative to an
26 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1
equivalent nondiscriminatory trade liberalization. Winters (1996) discusses theeffects of regionalism on third countries.
To the extent that nonmembers' exports are restricted, discriminatory tradebarriers would deny access to higher-quality and lower-priced goods for con-sumers in Mercosur's internal markets. For example, Chudnovsky, Lopez, andPorta (1996) study Mercosur's trade restrictions and regulations governing do-mestic production and imports of automotive products. They conclude that thequality of produced (within Mercosur) vehicles continues to be much lower andprices much higher than in other producing countries. The authors also notethat any "technological externalities" associated with the automotive regula-tions have been quite limited. Toulan and Guillen (1997) downplay the proposi-tion that regional integration arrangements are a useful vehicle for improving acountry's international competitiveness. Specifically, they argue that
Some claim that trading blocks can serve as a testing ground for eventualglobal integration as they allow firms to gradually develop international-ization skills. In many ways this argument is similar to the infant industryprotectionist argument, in which barriers are used to protect domesticindustries until they develop the skills necessary to compete internationally.Unfortunately, such policies have a fairly poor record in Latin America.The same potential fate could lie in store for firms operating under theprotection of Mercosur, in which their level of competitiveness is confinedto the demands and pressures of the Mercosur market, rather than theglobal one. While it is still too early to tell whether firms are in fact viewingMercosur as a launching pad, interviews with managers do not reveal thatthey are in fact doing this. (Toulan and Guillen 1996: 11.)
If Mercosur is consistent with WTO's rules (Article 24) for the formation ofcustoms unions—the working group examining this has yet to report—the re-sults in this article might provide a useful input into a review of those rules. TheUruguay Round Understanding on Article 24 calls for regular reviews of re-gional trade arrangements and proposes that trade creation and trade diversionbe analyzed for new arrangements. The empirical evidence examined in this studyaccents the importance of these functions. Given the recent proliferation of re-gional trade arrangements, this study's findings highlight the need for furtherempirical research on the domestic and international effects of these arrange-ments in order to assess the pros and cons of regionalism.
REFERENCES
The word "processed" describes informally reproduced works that may not be com-monly available through library systems.
Anderson, Kym. 1983. "Prospects for Trade Growth among Pacific Basin Countries."Developing Economies 21 (December):376-85.
Yeats 27
Behar, Jaime. 1995. "Measuring the Effects of Economic Integration for the SouthernCone Countries: Industry Simulations of Trade Liberalization." Developing Econo-mies 33(March):3-31.
Brown, A. J. 1947. Applied Economics. London: George Allen and Unwin.Chudnovsky, Daniel, Andres Lopez, and Fernando Porta. 1996. "Intra-Industry Trade
and Regional Integration: The Case of the Auto Industry in Argentina." In M. I.Lord, ed., Latin American Trade in Manufactures: A Handbook of Regional andCountry Case Studies. Ann Arbor: University of Michigan Press.
Donges, Juergen. 1987. "Comment." In Oli Havrylyshyn, ed., Exports of Develop-ing Countries: How Direction Affects Performance. Washington, D.C.: WorldBank.
Drysdale, Peter, and Ross Garnaut. 1982. "Trade Intensities and the Analysis of Bilat-eral Trade Flows in a Many-Country World: A Survey." Hitotsubashi Journal ofEconomics 2(2):62-84.
Finger, J. Michael, Melinda Ingco, and Ulrich Reincke. 1996. The Uruguay Round:Statistics on Tariff Concessions Given and Received. Washington, D.C.: WorldBank.
Havrylyshyn, Oli. 1987. "Evidence of Differences between South-South and South-NorthTrade." In Oli Havrylyshyn, ed., Exports of Developing Countries: How DirectionAffects Performance. Washington, D.C.: World Bank.
Havrylyshyn, Oli, and Martin Wolf. 1987. "What Have We Learned about South-SouthTrade?" In Oli Havrylyshyn, ed., Exports of Developing Countries: How DirectionAffects Performance. Washington, D.C.: World Bank.
Kojima, Kiyoshi. 1964. "The Pattern of Trade among Advanced Countries." HitotsubashiJournal of Economics 5(1): 16-36.
Laird, Sam, and Alexander Yeats. 1990. Quantitative Methods for Trade Barrier Analy-sis. London: Macmillan Press.
Lary, Hal. 1968. Imports of Manufactures from Developing Countries. New York: Na-tional Bureau of Economic Research.
Sapir, Andre. 1992. "Regional Integration in Europe." Economic Journal 102(415,November):1491-1506.
Toulan, Omar, and Mauro Guillen. 1997. "Beneath the Surface: The Impact ofRadical Economic Reforms on the Outward Orientation of Argentine andMendozan Firms, 1989-95." Journal of Latin American Studies 29(May):395-418.
Tuong, Ho Dae, and Alexander Yeats. 1980. "On Factor Proportions as a Guide to theFuture Composition of Developing Countries' Exports." Journal of DevelopmentEconomics 7(fall):276-97.
UNCTAD (United Nations Conference on Trade and Development) and World Bank. 1989.A User's Manual for SMART. Washington, D.C.: World Bank.
Winters, L. A. 1996. "Regionalism and the Rest of the World: Theory and Estimates ofthe Effects of European Integration." International Economics Department, WorldBank, Washington, D.C. Processed.
World Bank. 1992. Global Economic Prospects and the Developing Countries 1992.Washington, D.C.
WTO (World Trade Organization). 1996. Trade Policy Review—Brazil. Geneva.
28 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1
Yeats, Alexander. 1989. "Shifting Patterns of Comparative Advantage: ManufacturedExports of Developing Countries." Policy, Planning, and Research Working Paper165. International Economics Department, World Bank, Washington, D.C. Pro-cessed.
Zarocostas, John. 1996. "wro Criticizes Brazil for Straying from Reform." Journal ofCommerce (November 1).