Will the Real "Natural Trading Partner" Please Stand Up?

Abstract

Adherents to the "natural trading partner" hypothesis argue that forming a PTA is more likely to raise welfare if member countries already trade disproportionately with each other. Opponents of the hypothesis claim that the opposite is true: welfare is likely to be higher if member countries trade less with each other. This paper shows that neither analysis is correct and that the "natural trading partner" hypothesis can be rescued if it is redefined in terms of complementarity or substitutability rather than in terms of volume of trade.• JEL Classifications: F02, F13, F15

State, Society and International Relations in Asia

“…A major finding of the study by Soloaga and Winters is that regional integration has had a lesser effect on trade flows of developing countries than the effect caused by multilateral trade liberalisations. The criteria for choosing partners for trade blocs, being important from the policy perspective, has drawn the attention of several researchers (for instance, Schiff 2001 andVenables 196 SADEQUL ISLAM 2002). These researchers have explored the validity of alternative hypotheses such as 'the natural trading partner hypothesis' and comparative advantage.…”

Trade, Economic and Welfare Impacts of the CARICOM-Canada Free Trade Agreement

“…As a result, an important ingredient for the success of a FTA depends on the prospective members having a strong comparative advantage in different products (Kemal 2004;Pitigala 2005). Recent theoretical work by Schiff (2001) on the natural trading partner hypothesis has established that a high level of trade complementarity among prospective members of a FTA should increase the likelihood that the FTA will be welfare enhancing. Therefore, evaluating the pattern and persistence of comparative advantage and trade complementarity are very important indicators for determining the success of the proposed FTA between CARICOM countries and Canada.…”

Pursuit for Strategic Foreign Trade Market

“…Wonnacott and Lutz (1989), Krugman (1991), Panagariya (1997), Bhagwati andPanagariya (1996), Frankel etc. (1996), Schiff (1997Schiff ( , 1999 Krishana (2003) studied over this issue.…”