Latin American Trading Groups: Building or Stumbling Blocks? A Gravity Model With Panel Data

Abstract

This paper uses a gravity model with panel data and 3 regional dummies to assess the effects of the new free trade agreements signed between Latin American countries in the 90's. The originality of this research lies in the spectrum of agreements covered (big customs unions as well as bilateral free trade areas) and in its objective. We try to find out if the new zones boost trade between member countries and also with all the partners of the sub-continent. This question is essential as the choice between continental and sub-continental integration is still not clearly established. Our findings show evidence that all the selected groups (Mercosur, Andean Community, Group of 3, Free trade areas Bolivia-Mexico and Chile-Mexico) generate internal trade creations. Except for the Chile-Mexico agreement, the impact on the imports and on the exports with the rest of Latin America is also positive. The new groups represent building blocks (net trade makers) for the Latin American region. The revival of the regionalization process of the 90's thus entails an expansion of trade on the whole sub-continent. This result constitutes an argument for a South American free trade area which would precede an exposure to North American competition within the framework of the Free trade area of Americas.