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Regional Agreements and Welfare in the South: When Scale Economies in Transport Matter

Regional Agreements and Welfare in the South: When Scale Economies in Transport Matter By taking into account scale economies in transport, this paper challenges the accepted pessimistic view that regional preferential trade agreements (PTAs) between developing countries are harmful in welfare terms. In this paper, we assume the adoption of new transport technology when trade increases and show that, given the standard effect of a PTA on regional trade, the welfare would be higher than that usually claimed due to the induced effect on the regional transport network. Moreover, there is evidence that with such sunk costs in transportation, the sequence of trade liberalisation matters: the free trade achieved under a regional PTA would lead to permanently higher welfare than the one achieved under multilateral liberalisation. A standard model of inter- and intra-industry trade is used and augmented by a ‘hub-and-spoke’ transport network structure, where transport costs depend on the distance between trade partners, the volume of trade and the level of development. Under a plausible parameterisation for scale economies in transport, regional liberalisation will have persistent effect on trade flows through an irreversible effect on regional transport costs that improve welfare. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of African Economies Oxford University Press

Regional Agreements and Welfare in the South: When Scale Economies in Transport Matter

Carrère, Céline
Journal of African Economies , Volume 23 (3) – Jun 4, 2014
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Publisher
Oxford University Press
Copyright
© The author 2014. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oup.com
Subject
Articles
ISSN
0963-8024
eISSN
1464-3723
DOI
10.1093/jae/ejt029
Publisher site
See Article on Publisher Site

Abstract

By taking into account scale economies in transport, this paper challenges the accepted pessimistic view that regional preferential trade agreements (PTAs) between developing countries are harmful in welfare terms. In this paper, we assume the adoption of new transport technology when trade increases and show that, given the standard effect of a PTA on regional trade, the welfare would be higher than that usually claimed due to the induced effect on the regional transport network. Moreover, there is evidence that with such sunk costs in transportation, the sequence of trade liberalisation matters: the free trade achieved under a regional PTA would lead to permanently higher welfare than the one achieved under multilateral liberalisation. A standard model of inter- and intra-industry trade is used and augmented by a ‘hub-and-spoke’ transport network structure, where transport costs depend on the distance between trade partners, the volume of trade and the level of development. Under a plausible parameterisation for scale economies in transport, regional liberalisation will have persistent effect on trade flows through an irreversible effect on regional transport costs that improve welfare.

Journal

Journal of African Economies – Oxford University Press

Published: Jun 4, 2014

Keywords: JEL classification F12 F15 R4 O1

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