ABSTRACT
There has been a rapid proliferation of preferential trade arrangements. EC agreements with former colonies through the Lomé Convention, and the successor Cotonou Agreement, demonstrate that such arrangements are not limited to neighboring countries. We limit comments here to MERCOSUR, an example of a trade bloc among developing countries. It was first thought that developing countries would be especially likely to benefit from regional economic integration, because they could then overcome limitations imposed by the small size of national markets. Those hopes have not been widely realized. Regional economic integration among developing countries has not been very successful. When member countries export primary products such as coffee or cocoa, their major markets are in the industrial countries, and regional integration does nothing to expand the market. When it is a matter of developing a new industry, conflicts arise about its location within the customs union. Which country will get the new industry? Member countries do not like to pay a higher price to import the commodity from a partner country than they would have to pay in the world market. They correctly see this as a welfare loss from trade diversion.
