Transport Costs and "Natural" Integration in Mercosur

The paper explores the argument that trade between the Mercosur countries should be stimulated by preferential policies because of their geographic proximity. That is, that the Mercosur countries are candidates for "natural" integration. The paper finds that, on average, transportation margins on trade within Mercosur and between Mercosur and Chile are about 6 percentage points lower than on trade with the rest of the world. That is a significant margin, and one that was reflected in the countries' trade patterns even before regional trade agreements reduced the policy-based barriers to mutual trade. But it is probably not large enough, in and of itself (without other benefits), to make the introduction of trade preferences desirable. The paper also explores the argument that absolutely high transportation costs between Mercosur and the rest of the world (that is, not relative to intra-Mercosur costs) justify regional trade preferences. For this to apply the introduction of trade preferences must cause the Mercosur countries to cease importing some goods from the rest of the world completely. While Mercosur- - - rest-of-the-world transport costs certainly are high, trade patterns suggest that very few goods will cease to be imported from the rest of the world.