Preferential trade agreements and bilateral trade flow in Latin America

Sammanfattning: After studying economic integration it doesn’t come as a shock that preferential trade agreements (PTA) have an effect on the countries within the PTA, or outside the PTA for that matter also. The majority of the Latin American countries have been considered as developing countries for the better part of the 21st century, and have, for the most part, been secluded from the world market. Since the introduction of in particular ALADI (Asociación Latinoamericana de Integración, 1980), but also Mercosur (Mercado Común del Sur, 1991), the Latin American trade market has completely changed. The point of ALADI was to create a stable socio-economic environment for the involved countries, as well as ensuring development in a manner that eventually succumbed to a common Latin American market. Mercosur was created a decade later, where the major countries within ALADI had the goal to integrate further, by creating their own common market, where they benefited more towards each other without the remaining ALADI countries. To measure the exact effects that these PTAs have had on the different countries, an econometric estimation must be performed. The regression that will be executed here is the well-known gravity model of trade. A total of 22 countries are included in the equation, which means that there are 462 country-pairs that are examined over the time period of 1975-1995. The study shows that there is a specific correlation between the entry of a preferential trade agreement and the bilateral trade flow, especially concerning Mercosur. Looking at the first estimation, it is evident that the membership of Mercosur has led to an increase in bilateral trade flow with a rather substantial margin. Since there is a problem of multicollinearity in the estimations, this has led to it being hard to analyse ALADI in the specific estimations. However, when looking at the statistics, the evidence shows that countries that have entered a PTA (both ALADI and Mercosur) have increased their bilateral trade flow. This has to do with several factors that will be presented throughout the essay.