The Trade Effects of MERCOSUR and The Andean Community on U.S. Cotton Exports to CBI countries

Consequently, before Viner (1950), analysts often assumed that a customs union would
be welfare improving, since some tariffs would fall and tariffs are, in general, welfare reducing.
However, in 1950 Jacob Viner showed that a customs union will not necessarily improve
welfare, since the tariff reductions occur in a world of second best (Clausing 2001).

Trade diversion is revealed by a decline in the income elasticity of demand for extra-area
imports following integration. This occurs when RTA members shift their imports from more
efficient, nonmember producers, to less efficient partner countries within the RTA due to
preferential tariff treatment. This hurts consumers within the RTA, who now import from high-
cost members in the RTA (Burfisher 1998).

In addition, trade diversion leads to less efficient allocation of resources in the global
economy, and directly harms countries outside the agreement. It may, if severe enough, even hurt
members. If trade diversion is not too severe, however, it may benefit members more than it hurt
outsiders, so that the net effect on the world economy is positive (ERS/USDA, 1998).

Unfortunately, all of the potential problems described above are present in MERCOSUR
and the Andean Community. These RTAs pose a tremendous treat for U.S. cotton exports to
beneficiaries of the Caribbean Basin Initiative (CBI). Reason being, most of the CBI
beneficiaries have additional trade agreements with MERCOSUR and the Andean Community.
As a result, the U.S. can become comparably disadvantaged because of stiffer competition from
supplies within the respective trading blocs. Consequently, U.S. cotton exports to the CBI
beneficiaries can be diverted. This paper analyzes the effects these regional trade agreements
have on CBI countries cotton imports from U.S. by calculating the associated trade creation and
trade diversion values.

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