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Are Regional Trading Blocs "Natural"?

Nov 1997
Stanford King Center on Global Development Working Paper
A central statement of the natural trading partners theory is that, on welfare grounds, trade blocs with geographically proximate countries should be preferred to trade blocs with distant ones, i.e., that regional trade blocs are less likely to be trade diverting and thus "natural." A limited version of this theory suggests that trade blocs with significant trading partners should be preferred over trade blocs with less significant ones. This paper examines both these hypotheses using US trade data for the years 1964-1995 by first estimating welfare effects that would result from preferential tariff reductions by the US against various trading partners and then correlating these estimates with bilateral volume of trade and with "distance." While the volume of bilateral trade is found to be significant, geographic proximity is found to have no effect. Thus, for the US, this paper rejects the argument that regional trading blocs are natural.