Mercosul: Gains from Regional Integration and Exchange Rate Regimes

Abstract

This paper assesses the impacts of the Mercosul Preferential Trade Agreement on Brazil's regions and their industries between 1990 and 2000 by means of a gravity model, extended to include dummy variables for Mercosul, for a Brazilian region and for a industry within a region. The results show significant positive impacts between 1990 to 1998 to all of Brazil's regions, specially the Southern and Southeastern regions. It also shows that the change in the exchange rate regime in Brazil in January 1999 has not reverted the changes in trade biases created in the previous period, with the latter remaining at significantly high levels. The same results were observed for most of the sectors within the regions, i.e., their trade biases with Mercosul countries increased from 1990 to 1998 but fell in 2000, although to levels still higher than 1994 levels. This was specially true for those sectors where trade is managed within the bloc. For the sectors where this condition did not prevail, the drop in its trade bias was more pronounced for all regions.