How Regional Blocs Affect Excluded Countries: The Price Effects of MERCOSUR
Author(s)
Chang, Won; Winters, L. Alan
Abstract
The welfare effects of preferential trading arrangements are most directly linked to changes in trade prices, i.e. the terms of trade. This paper employs a simple strategic pricing game in segmented markets to measure the effects of MERCOSUR (a customs union between Argentina, Brazil, Paraguay and Uruguay) on the pricing of nonmember exports to Brazil. As Brazil exempts its MERCOSUR partners from tariffs, the resulting competitive pressure leads other exporters to reduce their prices. Working with detailed data on unit values and tariffs, it is found that the creation of MERCOSUR was associated with significant declines in the prices of nonmembers’ exports to the region.
