Preferential trading and the myth of natural trading partners

This paper refutes the validity of the 'natural trading partners' hypothesis according to which a preferential trading agreement (PTA) is more likely to benefit its members, (1) the more they trade with each other prior to the agreement and (2) the more proximate they are. The paper shows that a high-tariff country such as Mexico loses from a PTA with a low-tariff country such as the United States. More importantly, in a complete reversal of the first natural trading-partners hypothesis, the larger the initial level of that country's imports from the partner, the more it loses from the PTA. The paper also provides an entirely plausible example in which, ceteris paribus, the gains to a country from participating in a PTA are less and losses more the more proximate the union partner. (C) 1997 Elsevier Science B.V.