Evaluating Bolivia's Choices for Trade Integration

Abstract

Regional integration initiatives have surged in Latin America while many countries have undertaken unilateral trade liberalization, and external market access prospects have improved with the successful conclusion of the Uruguay Round. The author examines the choices faced by one such country: Bolivia. To the extent that different regional trade agreements follow World Trade Organization (WTO) rules, they could increase market access and allow the countries to realize gains that unilateral liberalization might not have given them. In this sense, regional trade arrangement is not inconsistent with multilateral free trade based on the most-favored-nation (MFN) principle. Estimating export demands using ordinary least squares for different markets as well as an error correction model, constructing a trade compatibility index, and recognizing the presence of contraband trade, the author examines Bolivia's four main options for regional integration and ranks them as follows: 1) MFN-based trade combined with a regional agreement that gives it preferential access to Mercosur (GATT-plus trade); 2) Joining Mercosur and maintaining duty-free access to the Andean Group; 3) Remaining within the Andean Group and receiving additional market-access concessions from Mercosur; and 4) Remaining within the Andean Group and maintaining existing bilateral trading arrangements. These rankings reflect relative trade access to different markets, assuming stability of demand functions and trade and production patterns. In the final analysis, regional integration is not merely a matter of economics, but is related to domestic and regional politics - and those who gain from different choices will support those choices. MFN trade would elicit neither strong opposition nor strong support, as its benefits and costs are more symmetrically distributed than trade associated with increased regional integration.