North-South technology diffusion, regional integration, and the dynamics of the “natural trading partners” hypothesis

Abstract

Based on static analysis, a number of studies argue that forming a RTA is more likely to raise welfare if member countries are natural trading partners, while other studies claim the opposite. This paper considers the argument from a dynamic viewpoint by examining the impact of trade with Japan, North America and the EU on technology diffusion and TFP in Korea, Mexico and Poland. Using industry-level data, we show that i) technology diffusion and productivity gains tend to be regional: Korea (Mexico) (Poland) benefits mainly from trade with Japan (North America) (the EU); and ii) the dynamic version of the natural trading partners hypothesis seems to hold for Korea and Mexico though not necessarily for Poland.