A Highway Across the Atlantic? Trade and Welfare Effects of the EU-Mercosur Agreement

Abstract

In this paper we analyze the EU-Mercosur agreement and predict its effects on trade and welfare using a general equilibrium structural gravity model. First, we estimate the increase in trade flows generated by trade agreements that are similar to the EU-Mercosur one, in a partial equilibrium setting. In a second step, the estimated increase in trade is mapped into reductions in bilateral trade costs and imputed to EU-Mercosur country pairs to compute the general equilibrium effects of the agreement in terms of trade creation, trade diversion, and welfare effects. Our results indicate that the EU-Mercosur agreement is likely to have a positive impact on trade and welfare of both regional blocs, although with substantial heterogeneity both between and within the two areas.