Does Mercosur's Trade Performance Raise Concerns about the Effects of Regional Trade Arrangements?

This study employs a new methodological approach that measures production efficiency in changing trade patterns. It shows that the most rapidly growing products in Mercosur's intratrade generally are goods in which members do not have a comparative advantage and have not been able to export competitively to outside markets. This is consistent with substantial trade diversion within the arrangement. Mercosur's discriminatory tariffs against nonmembers, which are four to six times higher than those in arrangements such as the European Union, European Free Trade Area, or North American Free Trade Agreement, are likely the cause. Recent further increases in Mercosur's tariffs against nonmembers are likely to exacerbate the magnitude of trade diversion.