Evaluating Bolivia's Choices for Trade Integration

Bolivia -- which has liberalized its trade regime unilaterally on a most-favored-nation basis -- now faces a number of choices for maintaining its position within the Andean Group and for receiving preferential access to Mercosur. Given the size of the market and its potential for export growth, a preferential arrangement with Mercosur is probably the best choice. Regional integration initiatives have surged in Latin America at the same time that many countries on the continent have undertaken unilateral trade liberalization, and prospects for access to external markets have improved with the successful conclusion of the Uruguay Round. Rajapatirana examines the choices faced by one such country: Bolivia. To the extent that different regional trade agreements follow World Trade Organization (WTO) rules, they could increase access to markets and allow the countries to realize gains that unilateral liberalization might not have given them. In this sense, regional trade arrangement are not inconsistent with multilateral free trade based on the most-favored-nation (MFN) principle. Estimating export demand functions using ordinary least squares for different markets as well as an error correction model, constructing a trade compatibility index, and recognizing the presence of contraband trade, Rajapatirana examines Bolivia's four main options for regional integration and ranks them as follows (with the first being Bolivia's best choice): ° MFN-based trade combined with a regional agreement that gives it preferential access to Mercosur (GATT-plus trade). ° Joining Mercosur and maintaining duty-free access to the Andean Group. ° Remaining within the Andean Group and receiving additional market-access concessions from Mercosur. ° Remaining within the Andean Group and maintaining existing bilateral trading arrangements. These rankings merely reflect relative...