DO TRANSPORT COSTS JUSTIFY REGIONAL PREFERENTIAL TRADING ARRANGEMENTS- NO

This paper reaches two conclusions. First, in evaluating PTAs, no spec ial consideration need be given to transport costs over other types of costs. Unless one focuses on cases in which PTA and global free-trade outcomes are identical, it does not matter whether differences in del ivered prices result from transport costs or from differences in techn ology or factor endowments. Second, gravity models are inherently inca pable of giving any guidance on whether a specific grouping is desirab le or whether transport costs make regional PTAs desirable. The gravit y equation is consistent with virtually any trade model. The welfare i mplications of PTAs, however, depend crucially on the specific model. JEL no. F02, F15.