Theory and Empirics
Edited by Neri Salvadori, Pasquale Commendatore and Massimo Tamberi
Chapter 6: South–South Regional Trade Agreements, Comparative Advantage and Industrial Growth: Evidence from MERCOSUR Countries
Alessia Lo Turco 6.1. INTRODUCTION A vast number of South–South Regional Trade Agreements (RTAs) were signed during the 1990s and, as a consequence, South–South trade flows have increased substantially. This chapter sets out to provide evidence on the existence of a long-run relation between the formation of a South–South bloc and industrial growth in member countries, seeking to account for possible differential long-run effects from integration. The formation of South–South RTAs can affect countries and even sectors within countries in a different manner, with comparative advantage sectors being fostered and the remaining ones being possibly negatively affected by competition within the bloc. This holds especially for smaller partners which do not possess a major internal market size to take advantage of economic geography forces when comparative advantage is missing. This long-run nexus is specified as a cointegrating relationship between industrial output and the South–South bloc formation. The RTA is identified by the evolution of the preferential margin applied by partners in each sector. Estimation of the long-run relation is tackled by means of panel DOLS (Mark and Sul, 2003). Apart from the estimation of a homogeneous cointegrating vector for the whole group, separate cointegration relations for comparative advantage and disadvantage sectors were estimated in order to highlight whether the South–South integration has fostered specialization more than diffusion of industrial activities. Finally, empirical investigation is conducted on the MERCOSUR agreement: though some work has been done (Sanguinetti et al., 2004) on the effects of MERCOSUR...
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