《Market presence》.pdf

Journal of International Economics 60 (2003) 161–175 /locate/econbase M arket presence, contestability, and the terms-of-trade effects of regional integration Maurice Schiffa , *, Won Changb a World Bank, Development Research Group, Mailstop No . MC3-303, 1818 H . St., Washington, DC 20433, USA b US Department of Treasury, Office of International Trade, 1440 NY Room 4203, 1500 Pennsylvania Avenue, Washington, DC 20220, USA Received 30 November 2000; received in revised form 27 July 2001; accepted 19 December 2001 Abstract This paper examines the impact of market presence and contestability on the price behavior of US exporters in Brazil’s market when MERCOSUR and MFN trade liberaliza- tion take place. Using detailed panel data on trade and tariff rates, we find that both the preferred supplier’s market presence and threat of entry lower (raise) the US price reaction to MFN (preferential) trade liberalization, with similar quantitative effects. Thus, presence in, or threat of entry into, partners’ markets implies lower optimal MFN tariffs, and regional agreements can have pro-competitive effects in contestable markets. We also examine the ‘symmetry’ hypothesis between the effect of tariffs and exchange rates.  2002 Elsevier Science B.V. All rights reserved. Keywords : Contestable market; Regional integration; MERCOSUR; MFN liberalization JEL classification : F13; F15; C33; L1 1. Introduction The number of regional integration agreements (RIAs) has increased dramatical- ly in the last decade. In fact, nearly all members of the WTO belong now to one or *Corresponding author. Tel.: 11-202-473-796