PREFERENTIAL TRADING AND THE MYTH OF NATURAL TRADING PARTNERS

This paper refutes the validity of the 'natural trading partners' hypo thesis according to which a preferential trading agreement (PTA) is mo re likely to benefit its members, (1) the more they trade with each ot her prior to the agreement and (2) the more proximate they are. The pa per shows that a high-tariff country such as Mexico loses from a PTA w ith a low-tariff country such as the United States. More importantly, in a complete reversal of the first natural trading-partners hypothesi s, the larger the initial level of that country's imports from the par tner, the more it loses from the PTA. The paper also provides an entir ely plausible example in which, ceteris paribus, the gains to a countr y from participating in a PTA are less and losses more the more proxim ate the union partner. (C) 1997 Elsevier Science B.V.