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August 1999 - Adherents of the natural trading partner hypothesis argue that preferential trade agreements are more likely to improve welfare if participating countries already trade disproportionately with each other. Opponents argue the opposite. Neither side is right. The hypothesis holds up only if two countries are natural trading partners in the sense that one country tends to import what the other exports. Adherents of the natural trading partner hypothesis argue that preferential trade agreements (PTAs) are more likely to improve welfare if participating countries already trade disproportionately with each other. Opponents of the hypothesis claim that the opposite is true: welfare gains are likely to be greater if participating countries trade less with each other. Schiff shows that neither analysis is correct. The natural trading partner hypothesis can be rescued if it is redefined in terms of complementarity or substitutability in the trade relations of countries, rather than in terms of their volume of trade. Schiff asks not whether a country should form or join a trading bloc but which partner or partners it should select if it does join such a bloc. He shows that the pre-PTA volume of trade is not a useful criterion for selecting a partner. The pre-PTA volume is equal to zero if the partner is an importer of the good sold to the home country and it is indeterminate if the partner is an exporter of that good. Among Schiff's conclusions: The home country is better off with a large partner country. First, a large partner is more likely to satisfy the home country's import demand at the world price. Second, the home country is likely to gain more on its exports to a large partner country, because that partner is likely to continue importing from the world market after formation of the trading bloc. And since the partner charges a tariff on imports from the world market, the home country is more likely to improve its terms of trade by selling to the partner at the higher tariff-inclusive price if the partner is large; The PTA as a whole is likely to be better off if each country imports what the other exports (rather than each country importing what the other imports). Losses are similar but less likely, while gains are both more likely and the same or larger. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to understand the economics of regional integration. The author may be contacted at mschiff@worldbank.org.

Currencies and Exchange Rates --- Customs Unions --- Economic Theory and Research --- Emerging Markets --- External Trade --- Finance and Financial Sector Development --- Free Trade --- Free Trade Agreements --- Free Trade Areas --- International Economics & Trade --- International Trade --- Law and Development --- Macroeconomics and Economic Growth --- Markets and Market Access --- Perfect Competition --- Preferential Trade --- Preferential Trade Agreement --- Private Sector Development --- Public Sector Development --- Regional Integration --- Regional Trade --- Tariff --- Tariff Revenues --- Trade --- Trade and Regional Integration --- Trade Creation --- Trade Diversion --- Trade Law --- Trade Policy --- Transport Costs --- Volume Of Trade --- World Trade

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June 2000 - If negotiations on trade in services at the World Trade Organization are to advance liberalization beyond levels undertaken unilaterally and lead to more balanced outcomes, reciprocity must play a greater role in negotiations. This may be facilitated by the use of negotiating rules that establish credible links across sectors and modes of delivery. Negotiations on trade in services at the World Trade Organization (WTO) have so far produced little liberalization beyond levels countries have undertaken unilaterally. One reason: limited application of the traditional negotiating principle of reciprocity. In particular, participants have failed to exploit the scope of the services agreement (GATS) for the exchange of market-access concessions across different modes of supply - cross-border delivery and the movement of capital and workers. Using the Heckscher-Ohlin-Vanek framework, Mattoo and Olarreaga propose a negotiating formula that generalizes the fundamental WTO principle of reciprocity to include alternative modes of delivery. Adoption of this formula as a basis for negotiations could bring greater commitments to liberalization on all modes of delivery, producing substantial gains in global welfare and more balanced outcomes. This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to improve trade policy in goods and services. The authors may be contacted at amattoo@worldbank.org or molarreaga@worldbank.org

Agreement on Trade --- Border Trade --- Comparative Advantage --- Concessions --- Economic Theory and Research --- Emerging Markets --- Foreign Labor --- Foreign Markets --- Free Trade --- International Economics & Trade --- International Trade and Trade Rules --- Macroeconomics and Economic Growth --- Market Access --- Private Sector Development --- Public Sector Development --- Reciprocal Reduction --- Reciprocity --- Tariff --- Tariff Reduction --- Terms Of Trade --- Terms Of Trade Effects --- Trade and Services --- Trade Effect --- Trade Negotiations --- Trade Policy --- Volume Of Trade --- Welfare Gains --- World Trade --- World Trade Organization