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We study the performance of the four Western Hemisphere trading blocs during the period 1978-2001. For the North American Free Trade Agreement (NAFTA), trade integration outweighed trade diversion; for MERCOSUR, increased integration and trade diversion went hand in hand; for the Central American Common Market (CACM) and the Andean Community, the evidence points to trade diversion only. We also find that trade among neighboring countries has increased since the early 1990s. The estimations are based on a nonlinear gravity equation that incorporates the hypothesis that exports create externalities that affect trade costs. This hypothesis might help reconcile the theoretical unitary income elasticity with most empirical findings of a non-unitary income elasticity in studies using the gravity equation.

Trade blocs --- International trade. --- External trade --- Foreign commerce --- Foreign trade --- Global commerce --- Global trade --- Trade, International --- World trade --- Commerce --- International economic relations --- Non-traded goods --- Regional economic blocs --- Regional trading blocs --- Trading blocs --- International trade --- Econometrics --- Exports and Imports --- Empirical Studies of Trade --- Economic Integration --- Trade: General --- Trade Policy --- International Trade Organizations --- Econometric Modeling: General --- Financial Aspects of Economic Integration --- International economics --- Econometrics & economic statistics --- Exports --- Trade agreements --- Imports --- Gravity models --- Trade integration --- Econometric analysis --- Economic integration --- Commercial treaties --- Econometric models --- International economic integration --- Mexico