New Empirical Insights into the “Natural Trading Partner” Hypothesis for CARICOM Countries

Khadan, Jeetendra and Hosein, Roger (2013): New Empirical Insights into the “Natural Trading Partner” Hypothesis for CARICOM Countries.

Abstract

The central notion of the natural trading partner hypothesis is that a Free Trade Agreement (FTA) will be welfare enhancing for members if there is a strong level of bilateral trade complementarity among their trade structures. This paper presents an empirical examination of this issue with reference to a small developing trade bloc–the Caribbean Community (CARICOM) and its trading partners. The trade intensity index model is used to assess the determinants of intra-CARICOM and extra-CARICOM trade, placing focus on trade complementarity. The results showed that intra-CARICOM trade complementarity is low and concentrated in a few primary industries which can provide a possible explanation for the persistent low levels of intra-CARICOM trade. The findings also indicate that trade complementarity is generally low between CARICOM countries and their proposed FTA partners in the European Union (EU) and North America. The best natural trading partners for CARICOM countries are then identified based on a ranking of countries from 7 regions (CARICOM, the EU, North America, Asia, Central America, Latin America and Africa).

• Item Type: MPRA Paper
• Language: English
• Keywords: natural trading partner hypothesis, trade complementarity, trade intensity index model, CARICOM countries
• Subjects: F - International Economics > F1 - Trade > F13 - Trade Policy ; International Trade Organizations; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; F - International Economics > F1 - Trade > F15 - Economic Integration

References

Aggarawal, Mangat R., and Posh R. Pandey. 1992. “Prospects of Trade Expansion in the SAARC Region.” The Developing Economies 30 (1): 3-21.

Anderson, Kym, and Ross Garnaut. 1985. “Australia’s trade growth with developing economies.” The Developing Economies 23 (2): 121–37.

Anderson, Kym. 1983. “Intensity of Trade between Pacific Basin Countries.” Pacific Economic Papers 102, Australia-Japan Research Center, Canberra.

Balassa, Bela. 1965. “Trade Liberalization and Revealed Comparative Advantage.” Manchester School of Economic and Social Studies 33 (2): 99-123.

Bhagwati, Jagdish, and Arvind Panagariya. 1996. “Preferential Trading Areas and Multilateralism – Strangers, Friends or Foes?” In The Economics of Preferential Trade Agreements, edited by Jagdish Bhagwati and Arvind Panagariya, 1-78. Washington D.C.

Bhagwati, Jagdish. 1993. “Regionalism and Multilateralism: An Overview.” In New Dimensions in Regional Integration, edited by Jaime de Melo and Arvind Panagariya, 22-51, New York, Cambridge University Press.

Bjørnskov, Christian, and Ekaterina Krivonos. 2001. “From Lomé to Cotonou, the new EU-ACP agreement.” Working Paper 14, Danish Institute of Agricultural and Fisheries Economics, Denmark.

Chow, Peter, Mitchell Kellman, and Yochanan Shachmurove. 1999. “A test of the Linder hypothesis in Pacific NIC trade 1965-1990.” Applied Economics 31 (2): 175-82.

Deardorff, Alan V., and Robert M. Stern. 1994. “Multilateral Trade Negotiations and Preferential Trading Arrangements.” In Analytical and Negotiating Issues in the Global Trading System, edited by Deardorff, A. V. and R. M. Stern, 27-94. Ann Arbor: University of Michigan Press.

Drysdale, Peter D. 1967. “Australian–Japanese Trade.” PhD Thesis. Australian National University, Canberra, Australia.

Drysdale, Peter D., and Ross Garnaut. 1982. “Trade Intensities and the Analysis of Bilateral Trade Flows in a Many-Country World: A Survey.” Hitotsubashi Journal of Economics 22 (2): 62–84.

Drysdale, Peter D., and Xinpeng Xu. 2004. “Taiwan’s Role in the Economic Architecture of East Asia and the Pacific.” Pacific Economic Papers 343, Australian National University, Australia.

Elliott, Robert J. R., and Kengo Ikemoto. 2004. “AFTA and the Asian Crisis: Help or Hindrance to ASEAN Intra- Regional Trade?” Asian Economic Journal 18 (1): 1-23.

Farrell, Trevor. 2001. “Five Major Problems for CARICOM.” In The Caribbean Community: Beyond Survival, edited by Kenneth Hall, 8-16. Kingston: Ian Randle Publishers.

Feaver, Donald, and Kenneth Wilson. 2005. “Preferential trade agreements and their implications for customs services.” Working Paper 05-03, Zayed University, Dubai.

Gil-Pareja, Salvador, Rafael Llorca-Vivero, and Jose Antonio Martínez-Serrano. 2012. “Trade Effects of Continental and Intercontinental Preferential Trade Agreements.” Transformations in Business and Economics 11 (1): 20-34.

Greenaway, David, and Chris Milner. 1986. The Economics of Intra-Industry Trade. Oxford: Blackwell.

Hapsari, Indira M., and Carlos Mangunsong. 2006. “Determinants of AFTA Members’ Trade Flows and Potential for Trade Diversion.” Working Paper 21, Asia-Pacific Research and Training Network on Trade, Bangkok, Thailand.

Hill, Hal. 1985. “Australia-Philippine Trade Relations.” Journal of Philippine Development 12 (2): 253-273.

Kemal, Abdul R. 2004. “Exploring Pakistan’s Regional Economic Cooperation Potential.” The Pakistan Development Review 43 (4): 313-334.

Kim, Seung J. 2007. “Korea’s trade intensity with her major trading countries in the manufacturing sector: Its changes over the last decade.” International Area Review 10 (1): 151-174.

Kim, Seung J. 2012. “South Korea’s Trade Intensity with ASEAN Countries and Its Changes over Time.” International Review of Business Research Papers 8 (4): 63–79.

Krishna, Pravin. 2003. “Are Regional Trading Partners ‘Natural’?” Journal of Political Economy 111 (1): 202–226.

Krueger, Anne O. 1999. “Are Preferential Trading Arrangements Trade-Liberalizing or Protectionist?” Journal of Economic Perspectives 13 (4): 105-124.

Krugman, R. Paul. 1991. “The Move Toward Free Trade Zones.” Economic Review 76 (6): 5-25.

Krugman, R. Paul. 1993. “Regionalism versus Multilateralism: Analytical Notes.” In New Dimension in Regional Integration, edited by Jamie de Melo and Arvind Panagariya, 58-78. Cambridge: Cambridge University Press.

Lawrence, Robert Z. 1996. Regionalism, Multilateralism, and Deeper Integration. Washington D.C.: The Brookings Institution Press.

Lee, Chang-Soo, and Soon-Chan Park. 2006. “An examination of the formation of natural trading blocs in East Asia.” Asian Economic Papers 4 (1): 90-103.

Lipsey, Richard G. 1960. “The Theory of Customs Unions: A General Survey.” Economic Journal 70 (September 1960): 496-513.

Magee, Christopher S. P. 2004. “Trade Creation, Trade Diversion, and Endogenous Regionalism.” Mimeo. Econometric Society 2004 North American Summer Meetings 289, Econometric Society.

Menon, Jayant. 1996. Adjusting towards AFTA: The Dynamics of Trade in ASEAN. Institute of Southeast Asian Studies. Singapore.

Morgan, David J. 1962. “Imperial Preference in the West Indies and in the British Caribbean, 1929-55: A Quantitative Analysis.” The Economic Journal 72 (285): 104-133.

Nadav, Halevi, and Ephraim Kleiman. 2008. “Middle East Integration and the Barcelona Process.” Agora Without Frontiers 13 (4): 394-413.

Osimani, Rosa. 2005. “Mercosur-FTAA Trade: Evolution and Perspectives.” In Mercosur and the Creation of the Free Trade Area of the Americas, edited by Fernando Lorenzo and Marcel Vaillant, 47-75. Washington: Woodrow Wilson Center Report on the Americas.

Panagariya, Arvind. 1999. “The Regionalism Debate: An Overview.” The World Economy 22 (4): 477-512.

Park, Jong H. 1995. “The New Regionalism and Third World Development.” Journal of Developing Societies 11 (1): 21-35.

Pitigala, Nihal. 2005. “What Does Regional Trade in South Asia Reveal about Future Trade Integration? Some Empirical Evidence.” Working Paper 3497, World Bank Policy Research, World Bank, Washington D.C.

Ramayandi, Areif. 2005. “ASEAN Monetary Cooperation: Issues and Prospects.” Pacific Economic Papers 349, Australia National University, Australia.

Sarmad, Khwaja, and Riaz Mahmood. 1988. “Prospects for Expanding Trade between SAARC and ASEAN Countries.” The Pakistan Development Review 27 (2): 131-136.

Schiff, Maurice. 2001. “Will the Real ‘Natural Trading Partner’ Please Stand Up?” Journal of Economic Integration 16 (2): 245-261.

Shakur, Shamim, and Chris Nees. 2011. “An application of the natural trading partner hypothesis to New Zealand-ASEAN trade.” Economics Bulletin 31 (4): 3077-3088.

Summers, Lawrence. 1991. “Regionalism and the World Trading System.” Paper presented at the Policy Implications of Trade and Currency Zones. A symposium sponsored by the Federal Reserve Bank of Kansas City.

Tash Mohim S., Idris B. Jajri, and Mohammad N. S. Tash. 2012. “An Analysis of Bilateral Trade between Iran and D-8 Countries.” Global Journal of Management and Business Research 12 (2): 26-34.

Thornton, John. 1987. “The nature of Japan's trading relationship with ASEAN countries.” ASEAN Economic Bulletin 3 (3): 368-378.

Trebilcock, Michael J., and Robert Howse. 2005. The Regulation of International Trade. New York: Routledge.

Vollrath, Thomas L. 2003. “North American Agricultural Market Integration and Its Impact on the Food and Fiber System.” Agriculture Information Bulletin No. 784.

Vollrath, Thomas L., and P. V. Johnston. 2001. “The changing structure of agricultural trade in North America.” Paper presented at Annual Meeting of Agricultural and Applied Economics Association, Chicago, August 5–8, 2001.

Weldemicael, Ermias O. 2010. “Bilateral Trade Intensity Analysis.” Working Paper, The University of Melbourne, Australia.

Wint, Alvin G. 2005. “The Economic Impact of Caribbean Regional Economic Integration: National Policy and Intra-Regional Performance Differences.” In Caribbean Imperatives: Regional Governance and Integrated Development, edited by Kenneth Hall and Denis Benn, 135-149. Kingston: Ian Randle Publishers.

Wonnacott, Paul, and Mark Lutz. 1989. “Is There a Case for Free Trade Areas?” In Free Trade Areas and U.S. Trade Policy, edited by Jeffery Schott, 59-84. Washington D.C. Institute for International Economics.

World Trade Organization. 2013. “CARIBCAN: Request for Extension of Waiver.” World Trade Organization, Geneva.

Yamazawa, Ippei. 1970. “Intensity Analysis of World Trade Flow.” Hitotsubashi Journal of Economics 10 (2): 61-90.

Yang, Yongzheng, and Sanjeev Gupta. 2005. “Regional trade arrangements in Africa: past performance and the way forward.” Working Paper 36, International Monetary Fund, Washington, D.C.

Yener, Kandogan. 2008. “Regionalism versus Multilateralism: Evidence for the Natural Trade Partners Theory from the Euro-Mediterranean Region?” Journal of Economic Integration 23 (1): 138-160.