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

volume between the U.S. and the CBI will increase through trade creation and trade
diversion effects. This study uses the Baldwin and Murray (1977) method the calculate
trade creation effects:

TC = M e (∆t / (1 + t)                                                        (3)

Where TC = trade creation effect for imports of U.S. cotton by top eight CBI importers

M = average level of cotton imports for U.S.

e = import demand elasticity with respect to price

∆t = changes in tariff

t = initial level of tariffs

The trade diversion effect is not easy to calculate, mainly because of difficulties in
empirically estimating substitution elasticities between commodities produced by
member countries and those produced by other countries. Baldwin and Murray (1977)
estimated trade diversion effects using the following equation:

TD = TC (Mn / V)                                                    (4)

Where TD = trade diversion effect for imports of U.S. cotton by top eight CBI importers

Mn = average imports of cotton from non-member countries

V = domestic production by top eight CBI importers

Verdoorn (1960) provided an alternative method for estimating trade diversion:

5) TD = TC (Mn / Mt)                                             (5)

Where (Mn / Mt) is the ratio of cotton imports from non-member countries to the
country’s total imports.

For empirical applications, the use of the Baldwin and Murray method requires
domestic production which is frequently unavailable (Sawyer and Sprinkle, 1989). As a

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