How regional blocs affect excluded countries - the price effects of MERCOSUR

The welfare effects of preferential trading agreements, are most directly linked to changes in trade prices - that is, the terms of trade. The authors use a simple strategic pricing game in segmented markets, to measure the effects of MERCOSUR on the pricing of"non-member"exports to the regional trading bloc. Working with detailed data on unit values, and tariffs, they find that the creation of MERCOSUR is associated with significant declines in the prices of non-members'exports to the bloc. These can be explained largely by tariff preferences offered to a country's partners. Focusing on the Brazilian market (by far the largest in MERCOSUR), they show that non-members'export prices to Brazil respond to both most-favorable-nation, and preferential tariffs. Preferential tariffs induce reductions in non-memberexport prices.